Inflation and Money

Topics: Inflation, Monetary policy, Central bank Pages: 8 (2003 words) Published: July 13, 2012
Unit 1: Explain how cigarettes could be called “money” in prisoner-of-war camps of World War II (refer to one or more of the three functions or characteristics of money in you answer).

In World War II, each prisoner received the same parcel included cigarettes. They would exchange the good and services through barter economy. Over the time, the economic in the camps developed and the bartering system became more complicated. It was difficult to satisfy a “double coincidence of want”. In order to simplify the system, cigarettes were widely used as “money”.

Cigarettes performed the function of money as a medium of exchange. This was because they were generally accepted among the prisoners. Firstly, they provide convenience for prisoner to hold and carry out. Secondly, it must be divisible into an appropriate number of units because they reflected the value of others goods and it easily to purchased.

Secondly, cigarettes also performed the function of money as a unit of account. Price of other goods were expressed in terms of cigarettes, it can be uniformity. Moreover, compared with other goods, the supply of cigarettes was more stable.

Thirdly, they performed the function of money as store of value. For the most transactions involved cigarettes and under highly liquidity, prisoner willing to trust it could be saved and spent at a future.

In conclusion that any kind of object fulfills these three functions which is a tool used to facilitate transactions, store wealth or to be used as a mean to compare values. Moreover, it could retain a constant purchasing power. Whereas also called “Money”. That’s why cigarettes could be called “money” in prisoner-of-war camps of World War II.

Unit 2: In no more than 300 words, outline the advantages and disadvantages of high leverage ratios for financial institutions.

Advantages of high leverage:
Leverage allows a financial institution to increase the potential gains or losses. A high leverage ratio may increase a risk but along with this higher risk also increase the potential for higher returns.

Economies of scale can reduce transactions costs by developing expertise and take advantage. It can able to encourage higher liquidity. Thus an efficient financial system channels can provide the highest rate of return for the use of the funds. Spenders can reduce the cost of assessing and pricing risks. In additional, they use this information to determine underwriting standards, set interest rates and manage their risk. Savers also collect information on the creditworthiness of prospective borrowers easily. These resources stimulate economic growth. They provide enterprises with the ability to produce more goods and services and to generate jobs.

Disadvantages of high leverage:
In the opposite side, the world economy has been integrated. But the rise of complex financial products and unregulated operators act in the excessive growth in development. Whereas once the problem in somewhere, it will implicate whole the global market. Financial crisis in USD is a good sample. When the U.S. stock felled down, the global stock market also dragged down. The U.S. downturn also kept damage in the global economy. Under the visible globalization, one important part of damage, other areas are negative.

Unit 3 : If the interest rate is 6.5%, what is the present value of a security that pays you $1,100 next years, $1,200 three years from now, and $1,400 six years from now. If this security sold $10,500, is the yield to maturity greater or less than 6.5%?Why?

|PV |= |1,100 |+ |1,200 |+ |1,400 | | | |(1+6.5%) | |(1+6.5%)3 | |(1+6.5%)6 | | | | | | | | | |PV |= |2,985.75 | | | | |

If the security sold for $10,500, the yield to maturity will be less than 6.5%, because the higher PV represents lower interest...
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