Assignment Package 1 Total Marks 60
Each short answer-question carries 3 marks
(You can use more space than provided under short-answer questions) Q1 Describe the role of interest rates in economic decision making. How does expected inflation matter in people's borrowing and investment decisions(See Ch 1, pages 5-6)
Customers are very sensitive to interest rates. There is always one decision or another – whether you want to buy goods or save up. Interest rates are what make educated people decide on those questions. If rates are high savings are very desirable, but there is real and nominal rate. If inflation is substantial it takes away the benefit of high interest rate for purpose of saving and it diminishes it.
Q2 How financial market determine prices of securities? List some of the factors that may cause shift in the demand and supply of securities. (Ch 2 pages 21-23) Financial Market operates just like any other market. There is demand for certain financial goods and that creates supply. Sometimes financial institutions come up with special creations to increase demand, to boost certain sales, sometimes it’s done to mask and re-package bad product (but that is another story). So financial market really isn’t that different form say commodity market.
Q3. Make a distinction between inside money and outside money. (See Ch 3, pages 4 1-44)
Inside money is money that is issued by FIs usually in a form of debt. Inside money is a liability to the one who issues it. It is known fact that net amount of inside money in an economy is zero, but most of the money circulating in economy is exactly inside money. Outside money is held in the positive net amounts, it is not a liability. Government issued money, gold, backed-up foreign securities – these are the examples of outside money.
Q4 Select the incorrect statement(s) from the following (This question carries 1 mark) (a)The simple equation that can be used to...
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