Homework Assignment – Week 1 - Answers.docxVIP

Homework Assignment – Week 1Chapter 1Why 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.When interest rates rise, how might businesses and consumers change their economic behavior?Businesses would cut investment spending because the cost of financing this spending is now higher, and consumers would be less likely to purchase a house or a car because the cost of financing their purchase is higher.How can a change in interest rates affect the profitability of financial institutions?A change in interest rates affects the cost of acquiring funds for financial institution as well as changes the income on assets such as loans, both of which affect profits. In addition, changes in interest rates affect the price of assets such as stock and bonds that the financial institution owns that can lead to profits or losses.Is everybody worse off when interest rates rise?No. People who borrow to purchase a house or a car are worse off because it costs them more to finance their purchase; however, savers benefit because they can earn higher interest rates on their savings.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.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.How does a decline in the value of pound sterling affect British consumers?It makes foreign goods more expensive and so British consumers will buy less foreign goods and more domestic goods.How does an increase in the value of the pound sterling affect American businesses?It makes British goods more expensive relative to American goods. American businesses will fi