Functions of Money
DISCUSSION QUESTIONS (70%)
ATTENTION:
You are required to provide your answers in your own words, not copied verbatim/directly from the e-textbook or online. Also, your explanation should be clear and elaborate.
1.
Discuss the four (4) functions of money (8%).
2.
Imagine that you are in the position of buying loans in the secondary market (that is, buying the right to collect the payments on loans) for a bank or other financial services company. Explain why you would be willing to pay more or less for a given loan if: (10%)
a. The borrower has been late on a number of loan payments
b. Interest rates in the economy as a whole have risen since the bank made the loan c. The borrower is a firm that has just declared a high level of profits
d. Interest rates in the economy as a whole have fallen since the bank made the loan
3.
The term “moral hazard” describes increases in risky behavior resulting from efforts to make that behavior safer. How does the concept of moral hazard apply to deposit insurance and other bank regulations? (10%)
4.
Discuss how each of the three (3) traditional monetary tools of the Federal Reserve Bank affects money supply, interest rates, consumption & investment, and real GDP. (15%)
5. Draw and properly label three graphs of money supply-money demand (in one graph), investment demand, and AD-AS (6%). Then, referring to the graphs in your explanation, use one of the three traditional monetary tool to explain how the monetary transmission mechanism works to close recessionary and also inflationary gaps. (9%)
6. Discuss three factors that may cause a shift of potential GDP to the right (6%). Also, explain how the three factors may lead to capital deepening (use graph(s) where necessary) (6%).
Instructor’s Name
Course
Date
Economics 101
Question 1: Functions of money
First, money is used as a medium of exchange for every type of commodity and service. It aids both selling and purchasing of products and services. Notably, today’s contemporary economy, founded on division of labor and specialization, and cannot be imagined without a generable acknowledged medium of exchange. Second, money is used as a unit of account or a measure of value. It implies that money happens to be a type of a mutual denominator that can be used to express the exchange value of every product and service. Third, money acts as a store of value. Precisely, it happens to be a repository of buying power over duration meaning it is utilized to save buying power from the period income is obtained until when it is used. Forth, money is utilized as a standard of deferred payment. Borrowing and lending cannot occur in an economy that does not have money.
Question 2
A borrower who is late in several payments of loan seems conceivably less probable to pay back the loan, or to pay it back on time, and thus one would want to a lower amount for the loan.
If the rates of interest generally have increased, then the loan made at a period of relatively reduced rates of interest appears less attractive, and one would want to pay a lower amount for it.
If the borrower happens to be an organization with a record of intensified profits, then it tends to be probable to pay back the loan, and one would be ready to pay a higher amount for it.
If the rates of interest i...