Question

1-explain the link between well-performing financial markets and economic growth. name one channel through which financial markets might effect economic growth and poverty ?

2-Explain the main difference between a bond and a common stock?

3-when interest rates decrease, how might businesses and consumers change their economic behavior?

4-How does the current size of the u.s budget deficit compare to the historical budget deficit or surplus for the time period since 1950?

5-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? Are U.S. companies that manufacture jeans happier when the dollar is strong or when it is weak? What about an American company that is in the business of importing jeans into the United States?

6-Much of the U.S. government debt is held by foreign investors as treasury bonds and bills. How do fluctua- tions in the dollar exchange rate affect the value of that debt held by foreigners?

Answer 1

3) When interest rates decrease, consumers are willing to spend more money on goods because they now receive fewer returns from their investments (for example, interest payments on money in savings accounts fall). In other words, they have less incentive to hold on to their money. On the other side, lower interest rates are good for businesses because they are now able to borrow money from banks with lower opportunity costs Loans they take out require relatively lower interest payments and this benefits businesses greatly. ) The current U.S. budget deficit is a [lot larger] relative to that since the 1950s. From 1950 to 1952, the United States had a budget surplus approximately equal to 2% of its GDP. This meant that the American government earned more revenue than it spent, similar to profits for businesses. However, by 2010, the United States had lost its surplus, and fell into a huge deficit equivalent to 10% of its GDP. 5) Here we need to discuss some further questions about the relationship between the foreign exchange rate and the business decision. First, when the dollar value is higher than other currencies then an American consumer should purchase foreign jeans because it would be cheaper for them to buy it. Due to the appreciation in Dollar value imported jeans from foreign countries would be cheaper in. Secondly, jeans manufacturer will be happy when the dollar value is weak. This is because if dollar becomes weaker then export from becomes cheaper and import from foreign becomes costlier. This will give the

manufacturer of jeans a greater comparative cost advantage in foreign market. Also it will result in a protection for them in domestic market because imports will become dearer. Thirdly, on the contrary an American company which imports jeans from foreign will be better off when dollar value appreciates. This is because when dollar value appreciates it makes the imports from foreign countries cheaper. As a result, this importer will have a cheaper access to the jeans and it will have a comparative cost advantage in the domestic market. 6) Fluctuations in the dollar exchange rate directly affect the value of the debt held by foreigners by changing the value of the money debtors are repaid by the government. Suppose one U.S. dollar exchanges for 20 pesos. When the exchange rate falls, the dollar loses its value and is now able to purchase only 15 pesos. Investors who own these bonds are paid-off in dollars that are now of less value; hence, decreasing the value of what they were owed. The reverse is true when the exchange rate rises. Hypothetically, the dollar could be exchanged for 25 pesos and investors are paid with dollars that are now worth more. This increases the value of what they were owed.