Week 10 Essay Example
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)
- The interest rate on a bank deposit tells you how many dollars you will earn. It does not tell you how much you will be able to buy with those dollars. To figure out how much you will be able to buy when you earn interest, you must consider that the prices of the goods you buy change over time. A person's decision about how much to save or invest depends not just on the interest rate but also on how much that person expects prices to change. The expected rate of change of prices is called the expected inflation rate. Thus, to understand consumer decisions about saving and investing, we need to examine both the interest rate and the expected inflation rate. The most important variable determining those decisions is the real interest rate, which equals the nominal (or dollar) interest rate minus the expected inflation rate. The real interest rate is particularly relevant to the formation of economic policy. In periods when the expected inflation rate was based on the historical average of inflation, policymakers knew that their policies would not immediately affect expected inflation. Thus, if they wanted to affect the real interest rate, all they had to do was to change the nominal interest rate, knowing that there would be a one-for-one change in the real interest rate.
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)
Q3. Make a distinction between inside money and outside money. (See Ch 3, pages 4
1-44)
Q4 Select the incorrect statement(s) from the following (This question carries 1 mark)
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)
- The interest rate on a bank deposit tells you how many dollars you will earn. It does not tell you how much you will be able to buy with those dollars. To figure out how much you will be able to buy when you earn interest, you must consider that the prices of the goods you buy change over time. A person's decision about how much to save or invest depends not just on the interest rate but also on how much that person expects prices to change. The expected rate of change of prices is called the expected inflation rate. Thus, to understand consumer decisions about saving and investing, we need to examine both the interest rate and the expected inflation rate. The most important variable determining those decisions is the real interest rate, which equals the nominal (or dollar) interest rate minus the expected inflation rate. The real interest rate is particularly relevant to the formation of economic policy. In periods when the expected inflation rate was based on the historical average of inflation, policymakers knew that their policies would not immediately affect expected inflation. Thus, if they wanted to affect the real interest rate, all they had to do was to change the nominal interest rate, knowing that there would be a one-for-one change in the real interest rate.
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)
Q3. Make a distinction between inside money and outside money. (See Ch 3, pages 4
1-44)
Q4 Select the incorrect statement(s) from the following (This question carries 1 mark)