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Finance and banking Essay

Chapter 1

1. Has the inflation rate in Canada increased or decreased in the past few years? What about interest rates?

R/. The inflation rate of CAnada is low. The inflation rate was at 1.10 % in August. And the interest rate was declining. In one news said that on 1915 until 2013, the Canada’s inflation rate 3.2% reaching an all time high of 21.6% in June of 1920 and got a record low at -17.8% in June of 1921.

2. If history repeats itself and we see a decline in the rate of money growth, what might you expect to happen to A. Real output – is going down
B. the inflation rate, and – is going down
C. Interest rates – is going down
All are going to fall.

3. When was the most recent recession?

According to the National Bureau of Economic Research (the official arbiter of U.S. recessions), there were 10 recessions between 1948 and 2011. And the recent recession started in December 2007 and finished in June 2009.

4. When interest rates fall, how might you change your economic behaviour? I will buy a car and house because the cost of them would fall. I think when the rates fall is good spend more money for get good properties and the future I can duplicate what I spend.

5. Can you think of any financial innovation in the past ten years that has affect you personally? Has it made you better off or worse off? Why?

I think all the inventions that the government made, for example the subway and trains. This made me better off, because for me I feel more comfortable with the transportation and for all the population, this made more opportunities for get a job.

6. Is everybody worse off when interest rates rise?

When net rest rates rise is not worse off, but for the people who borrow for get a house or a car would be worse off for them, because will cost more to finance their purchase.

7. What is the basic activity of banks?

Store money
Storing money for customers is the most classic of banking activities. Traditional banks, credit unions and savings institutions offer this service. Customers use bank accounts, such as checking or regular savings accounts, because most provide safe locations to store deposited money that is FDIC-insured, or protected by the Federal Deposit Insurance Corporation.

Facilitate Payments
Banks and financial institutions enable their customers to pay others. Customers are given checks, both paper and electronic, and other payment tools, such as debit cards. A customer is able to write a check or make a payment to an outside vendor, such as a grocery store, electricity company or other outside individual, with one of their designated payment tools. The financial institution sends money from the customer’s account to their designated payee.

Loan Money
Lending money allows a bank or financial institution to earn money, according to the FDIC website. This for-profit service involves the bank lending a sum of money to a customer and then charging interest as the loaned amount is repaid back to the institution. Loans are used to purchase or lease automobiles, buy homes, refinance mortgages, perform home repairs and other expensive projects.

12.How does a fall in the value of the pound sterling affect British consumers?

R/. This will makes the foreign goods expensive and the British are not going to buy this foreign goods because they are going to choose for the cheaper one.

13.How does an increase in the value of the pound sterding affect American businesses?

R/. For American business will be easier for sell their goods and they can sell it in the United States or abroad.

14.When the dollar is worth more in relation to currencies of other countries, are you more likely to buy American-made or foreign-made jean ? Are U.S.companies that make jeans happier when the dollar is strong or when it is weak? What about American company that is in the business of importing jeans into the United States?

R/. In the mid-to late 1970s and in the late 1980s and early 1990s, the value of the dollar was low, making travel abroad relatively more expensive; thus it was a good time to vacation in the United States and see the Grand Canyon. With the rise in the dollar’s value in the early 1980s, travel abroad became relatively cheaper, making it a good time to visit the Tower of London.

Chapter 2

1.Why is a share of IBM common stocks an asset for its owner and a liability for IBM?

The share of IBM stock is an asset for its owner because it entitles the owner to a share of the earnings and assets of IBM. The share is a liability for IBM because it is a claim on its earnings and assets by the owner of the share.

2.If I can buy a car today for $5000and it is worth $10,OOO in extra income next year to me because it enables me to get a job as a traveling anvil seller, Should I take out a loan from Larry the loan Shark at a 90% interest rate if no one else will give me a loan? Will I be better or worse off as a result of taking out this loan? Can you make a case for legalizing loan-sharking?

I should take out a loan from Larry, if I make a case for legalizing that would give problem and can affect the bank. It’s not good make a case.

3.Some economists suspect that one of the reasons that economies in developing countries so slowly is that they do not have well-developed financial markets. Does this argument make sense?

Yes, because the absence of financial markets means that funds cannot be channeled to people who have the most productive use for them. Entrepreneurs then cannot acquire funds to set up businesses that would help the economy grow rapidly.

10. If you are an employer, what kinds of moral hazard problems might you worry about with your employees?

R/. I would be concerned that they have their own responsibilities and they might steal things or do not good behaviour.

11.If there were asymetwmthe information that a borrower and a lender had, could there stiIl be a moral hazard problem?

Yes, because even if you know that a borrower is taking actions that might jeopardize paying off the loan, you must still stop the borrower from doing so. Because that may be costly, you may not spend the time and effort to reduce moral hazard, and so the problem of moral hazard still exists.

14.How does risk sharing benefit both financial intermediaries and private investors?

Risk sharing benefits and financial intermediaries are able to earn a spread.
Investors benefit are able to invest in good diversified portfolio.

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