Question

Homework1

1.List the three financial system components and their financial functions in an effective financial system.

2.Identify the four main types of financial markets.

3.Describe:

1. money markets

2. capital markets

3. primary markets

4.secondary markets

4.Briefly describe the 2007-2008 financial crisis.

5. Identify the three functions of money.

6. Define or discuss briefly:

a. Full-bodied money

b. Representative full-bodied money

c. Credit money '

d. Fiat money

7. Identify and briefly describe several types of money market securities.

8. Outline the various components of the U.S. money supply as it exists today.

9. Briefly describe basic differences in how monetarists and Keynesians view the relationship between money supply and economic activity.

10. The following information is available to you: travelers checks = $1 million; coin and paper currency = $30 million; repurchase agreements and Eurodollars = $15 million; demand deposits = $25 million; retail money market mutual funds = $60 million; savings accounts at depository institutions = $40 million; checkable deposits at depository institutions = $35 million; large-denomination time deposits = $50 million; institutional money market mutual funds = $65 million; and small-denomination time deposits = $45 million. Using Fed definitions, determine the dollar sizes of:

a.M1 money supply

b.M2 money supply

11. A country’s gross domestic product (GDP) is $20 billion and its money supply (MS) is $5 billion.

a. What is the country’s velocity of money (VM)?

b. If the MS stays at the same level next year while the velocity of money “turns over” 4.5 times, what would be the level of GDP?

c. Assume that the VM will turn over 4 times next year. If the country wants a GDP of $22 billion at the end of next year, what will have to be the size of the money supply? What percentage increase in the MS will be necessary to achieve the target GDP?

12. The One Product economy which produces and sells only personal computers (PCs),expects that it can sell 500 more or 12,500 PCs next year. Nominal GDP was $20,000,000 this year and the money supply was $7,000,000. The central bank for the One Product economy is planning to increase the money supply by 10 percent next year.

a.What was the average selling price for the personal computers this year?

b.What is the expected average selling price next year for personal computers if the velocity of money remains at this year’s turnover rate? What percentage change in price level is expected to occur?

c.If the objective is to keep the price level the same next year (i.e., no inflation), what percentage increase in the money supply should the central bank plan for?

d. How would your answer in Part c change if the velocity of money is expected to be three times next year?

Answer 1

1)

The three components of financial system are:

1. Financial institutions such as banks.
2. Financial instruments such as assets and securities.
3. Financial Markets.

Functions:

Financial institutions such as bank act as intermediaries between the borrowers i.e. those who are in need of money and the lenders.

Financial markets helps in the creation and transferring of financial assets. Bonds and shares are traded in financial market.

Financial instruments are the products which gets traded in the financial markets.

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