Your niece just started her college career with a major in economics. She is cur
ID: 1217869 • Letter: Y
Question
Your niece just started her college career with a major in economics. She is curious as to the interrelationship between the success of an economy and the financial markets, concepts, and financial institutions. Accordingly, she has developed a list of questions addressing these issues and has asked that you explain the ideas. 1. What are the financial markets and what purposes do they serve? 2. What are financial intermediaries? How do these intermediaries function in the economy? 3. What is a federal government budget deficit? What is the national debt? How does a budget deficit affect the economy? She is also curious about the time value of money concepts. Specifically, she has the following questions about these concepts: 4. Why are consumers considered to be risk averse? What methods could used to deal with risk? 5. It has been said that a dollar received today is worth more than a dollar received tomorrow. What does this mean and what is the significance to the economy? 6. What is the difference between the present value of a future sum of money and the future value of a present sum of money? What is the significance of these concepts to economics? 7. If you deposited $1,000 in an account paying 6% interest compounded annually, how long would it take to double?
Explanation / Answer
1. What are the financial markets and what purposes do they serve?
Financial Markets are the market place where the Buyer and sellers are participating in the Trade of Financial instruments such as Stocks, bonds, Currencies, Derivatives etc. The financial markets provide a transparent structure and regulations to buyers and sellers in determining the price of the instrument driven by the market force of supply and demand.
2. What are financial intermediaries? How do these intermediaries function in the economy?
Financial intermediaries are the financial institutions such as Banks, Mutual Funds, Insurance Companies, Investment banks etc. Which provide services on financial instruments or needs such as Loans, Investments, future financial planning to individuals or firms
3. What is a federal government budget deficit? What is the national debt? How does a budget deficit affect the economy?
When the Government plans to spends more money than its Revenue it is collecting via taxes, then it is called as Federal government budget Deficit.
National debt is the amount of money the government of the country has borrowed to meet the budget deficits.
The budget deficit can affect the economy. To meet the deficit government can borrow the money from public via Federal reserves. This will increase the national debt. To pay back the national debt, the government can print more currency. Which will increase the inflation. Also if the debtors lose the confidence on the country’s payback ability, then the investments to the country will fall which impact eh entire economy of the country.
4. Why are consumers considered to be risk averse? What methods could used to deal with risk?
Consumers wants to invest money where the returns are less but the risk of losing money is less. So they are called as risk Averse. To avoid the risk the Consumers invest money in Bank FDs and pension funds.
5. It has been said that a dollar received today is worth more than a dollar received tomorrow. What does this mean and what is the significance to the economy?
Yes a dollar received today is worth more than a dollar received tomorrow, as the inflation will eat up the worth of the dollar tomorrow. Means what can you buy today with one dollar, may not buy the same thing with one dollar, because the price of that thing might be increased due to inflation.
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