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Review 5 - BANK 1005(11941 Derivatives and Securities...

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BANK 1005(11941) Derivatives and Securities Markets Page 1 of 12 Review 5 (Topic 5 – Monetary Policy and Interest Rates) Questions and Problems You should answer the following Questions and Problems Chapter 7: 1, 3, 5 Chapter 8: 1, 3, 4, 5, 6, 7 Chapter 9: 1, 4, 5, 6 Chapter 10: 3, 5, 6, 7 Suggested solutions/guide to these Questions and Problems are provided in this Review 5 and are sourced from the reference indicated at the end of these notes. Consider this feedback as a guide toward writing a sound explanation, not as the “best answers”. You do need to employ your learning and thinking to craft a ‘good answer’. Good writing skills will also result in high quality discussions and arguments. I have provided some comments to hopefully assist you in thinking deeper. Learning about the financial markets involves using a “package” of resources and thinking, rather than just learning these “answers”. You need to show real understanding of the issues acquired from your learning and thinking in your explanations/arguments. Often, according to the authors of your book (in the preface), the problems and questions have been chosen to “provoke debate rather than a search for the ‘correct answer’.” Take these questions and the suggested feedback in this spirit! CHAPTER 7 1. What factors influence the rate of household saving? Discuss recent trends in saving in Australia. Factors that influence the rate of household saving are the level of household income, the age composition of household members and, in theory, the level of interest rates (in practice there is little empirical evidence indicating that the level of interest rates influences the level of household saving). Table 7.1 in the text shows that the household sector has generally been a net borrower on the capital account in the flow of funds matrix. Factors that may explain the low saving rate of households in Australia are the social security system (providing pensions on retirement), the double taxation of savings and the high level of unemployment among some socio-economic groups. Some commentators have argued that the easy availability of consumer credit has encouraged high levels of consumption among households on non-essential goods and services. 3. Should we be concerned about the size of Australia’s external debt? Assess arguments for and against the view that we should be concerned about the size and growth in external debt. The arguments against a large external debt are summarised as follows: 1. The demand by investors for repatriation of funds could severely destabilise the economy and result in a sharp depreciation in the value of the Australian dollar. 2. The debt needs to be serviced, and interest payments on foreign debt have, at times, been larger than Australia’s trade surplus.
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BANK 1005(11941) Derivatives and Securities Markets Page 2 of 12 Review 5 (Topic 5 – Monetary Policy and Interest Rates) 3. A large external debt can reduce Australia’s credit rating, resulting in higher borrowing costs.
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