The Economics of Money, Banking, and Financial Markets

1087 words 5 pages
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
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Also changes in foreign exchange rates affect the profits made by traders in foreign exchange who work for financial institutions.

18. According to Figure 8, in which years would you have chosen to visit the Grand Canyon in Arizona rather than the Tower of London?
Where the dollar was weak 1991, 1993, 1995 etc. the Grand Canyon
19. When the dollar is worth more in relation to currencies of other countries, are you more likely to buy American-made or foreign-made jeans?
When the dollar increases in value, foreign goods become less expensive relative to American goods; thus you are more likely to buy French-made jeans than American-made jeans. The resulting drop in demand for American-made jeans because of the strong dollar hurts American jeans manufacturers. On the other hand, the American company that imports jeans into the United States now finds that the demand for its product has risen, so it is better off when the dollar is strong.

20. Much of the U.S. government debt is held as treasury bonds and bills by foreign investors. How do fluctuations in the dollar exchange rate affect the value of that debt held by foreigners?
Foreign holders of this debt are concerned that the U.S. will let the dollar value decline so the relative value of its debt is less. As the dollar loses value, investors are less likely to hold assets in


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