Monetary Money

Study Questions

1.1 Has the inflation rate in the United States increased or decreased in the past few years? What about interest rates?

Inflation rates have increased within the last couple years, but it has decreased within the last year. This however is beginning to change once again. Just in the last two months the inflation rate has begun to gradually increase. On the other hand the interest rates have not changed very much they have remained the same. I base this information off of a site that I found very useful. It is called trading economics. It has very interesting information.

1.6 Is everybody worse off if interest rates rise?

No. It is true that 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.

1.11 What effect might a rise in stock prices have on consumers’ decisions to spend?

Higher stock prices means that consumers’ wealth is higher, and they will be more likely to increase their spending.

2.2 If I can buy a car today for $5,000 and it is worth $10,000 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?

Yes, I should take out the loan, because I will be better off as a result of doing so. My interest payment will be $4,500 (90% of $5,000), but as a result, I will earn an additional $10,000, so I will be ahead of the game by $5,500. Since Larry’s loan-sharking business can make some people better off, as in this example, loan sharking may have social benefits.

2.5 “Because corporations do not actually raise any funds in secondary markets, they are less important to the economy than primary markets.” Comment.

This statement is false. Prices in secondary markets determine the prices that firms issuing securities receive in primary markets. In addition, secondary markets make securities more liquid and thus easier to sell in the primary markets. Therefore, secondary markets are, if anything, more important than primary markets.

2.13 Why might you be willing to make a loan to your neighbor by putting funds in a savings account earning a 5% interest rate at the bank and having the bank lend her the funds at 10% interest rate rather than lend her the funds yourself?

Because the costs of making the loan to your neighbor are high (legal fees, fees for a credit check, and so on), you will probably not be able earn 5% on the loan after