Professional Documents
Culture Documents
ECO 551/553
QUESTION 1
a)
b)
QUESTION 2
a)
Distinguish between
i)
barter economies and monetary economies..
ii)
primary markets and secondary markets.
iii)
money markets and capital markets
b)
Using flows of funds charts, describe the direct finance and indirect finance.
(20 marks)
QUESTION 3
a)
Using the bond market and the money market, explain how the equilibrium
rate of interest is determined.
(5 marks)
b)
Suppose the economy moves into recession and there is general pessimism
about the future economic growth, how will this sentiment affect the
equilibrium rate of interest. Use bond and money market to explain your
answer.
(15 marks)
Test 1 (Answer)
QUESTION 1 (a) Describe the following terms / concepts:
i)
ii)
iii)
iv)
Question 2
a)
i)
Distinguish between
Barter economies and monetary economies.
2. Commodity Standard
Minted coins with non-monetary values developed. Face
value is equal to its market value.it can be legally melted for
non-monetary uses. This category of money is called fullbodied money.
FINANCIAL MARKETS
PRIMARY
CAPITAL MARKETS
SECONDARY
MONEY MARKETS
DEBT MARKETS
EXCHANGE OVER-THE
-COUNTER MARKETS
EQUITY MARKET
c)
INDIRECT
FINANCE
FINANCIAL
INTERMEDIARIES
FUNDS
FUNDS
FUNDS
SURPLUS UNITS
1.HOUSEHOLDS
2.BUSINESS
3.GOVERMNMENT
4.FOREIGNERS
FINANCIAL
MARKETS
DEFICITS UNIT
1.HOUSEHOLDS
2.BUSINESS
3.GOVERNMENT
4.FOREIGNERS
FUNDS
FUNDS
DIRECT
FINANCE
Direct finance
Indirect finance
QUESTION 3
a) Using the bond market and the money market, explain how the
equilibrium rate of interest is determined.
Money demand curve tells us how much money people want to hold at
each interest rate. Equilibrium in money market occurs when quantity
of money people are actually holding (quantity supplied) is equal to
quantity of money they want to hold (quantity demanded) Can we
have faith that interest rate will reach its equilibrium value in money
market? Yes
(b) Suppose the economy moves into recession and there is general pessimism about the
future economic growth, how will this sentiment affect the equilibrium rate of
interest. Use bond and money market to explain your answer.
Interest rate
Money market
When economy moves into recession there is general pessimism about the future
economic growth. At this point Equilibrium is equal to Money Supply and Money
Demand.
Equilibrium =Ms=Md
When there is business cycle expansion the aggregate output will increase.
When aggregate income increase, money demand will increase.
So as a conclusion, when we have business expansion the interest rate will increase.