The Economics of Money, Banking, and Financial Markets
CHAPTER 1
1. What is the typical relationship between interest rates on three-month Treasury bills, long-term treasury bonds, and Baa corporate bonds?
The interest rate on three-month Treasury bills fluctuates more than the other interest rates and is lower on average. The interest rate on Baa corporate bonds is higher on average than the other interest rates.
2. What effect might a fall in stock prices have on business investment?
The lower price for a firm’s shares means that it can raise a smaller amount of funds, and so investment in plant and equipment will fall.
3. What effect might a rise in stock prices have on consumers’ decisions to spend?
Higher stock prices mean that consumers’ wealth is higher and so they will be more likely to increase their spending.
4. Why are financial markets important to the health of the economy?
Because they channel funds from those who do not have a productive use for them to those who do, thereby resulting in higher economic efficiency.
5. What was the main cause of the recession that began in 2007?
The main cause of the recession that began in 2007 was the defaults in subprime residential mortgages led to major losses.
6. What is the basic activity of banks?
Banks accept deposits and then use the resulting funds to make loans.
7. What are other important financial intermediaries in the economy besides banks?
Savings and loan associations, mutual savings banks, credit unions, insurance companies, mutual funds, pension funds, and finance companies
8. Can you think of any financial innovation in the past 10 years that has affected you personally? Has it made you better or worse off? In what way?
9. Has the inflation rate in the U.S. increased or decreased in the past few years? What about the interest rates?
The inflation rate in the U.S. increased in the past few years and the interest rates decreased.
10.If the history repeats itself and we see a decline in the rate of money growth, what
1. What is the typical relationship between interest rates on three-month Treasury bills, long-term treasury bonds, and Baa corporate bonds?
The interest rate on three-month Treasury bills fluctuates more than the other interest rates and is lower on average. The interest rate on Baa corporate bonds is higher on average than the other interest rates.
2. What effect might a fall in stock prices have on business investment?
The lower price for a firm’s shares means that it can raise a smaller amount of funds, and so investment in plant and equipment will fall.
3. What effect might a rise in stock prices have on consumers’ decisions to spend?
Higher stock prices mean that consumers’ wealth is higher and so they will be more likely to increase their spending.
4. Why are financial markets important to the health of the economy?
Because they channel funds from those who do not have a productive use for them to those who do, thereby resulting in higher economic efficiency.
5. What was the main cause of the recession that began in 2007?
The main cause of the recession that began in 2007 was the defaults in subprime residential mortgages led to major losses.
6. What is the basic activity of banks?
Banks accept deposits and then use the resulting funds to make loans.
7. What are other important financial intermediaries in the economy besides banks?
Savings and loan associations, mutual savings banks, credit unions, insurance companies, mutual funds, pension funds, and finance companies
8. Can you think of any financial innovation in the past 10 years that has affected you personally? Has it made you better or worse off? In what way?
9. Has the inflation rate in the U.S. increased or decreased in the past few years? What about the interest rates?
The inflation rate in the U.S. increased in the past few years and the interest rates decreased.
10.If the history repeats itself and we see a decline in the rate of money growth, what