Chapter 2 - Self-Study Problems

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Chapter 2 - Self-Study Problems

Economic units that need to borrow money are said to be:

Lender-savers

Borrower-spenders

Balanced budget keepers

None of the above

Explain what the marketability a security is and how it is determined

Marketability refers to the ease with which a security can be sold and converted into cash. The level of marketability depends on the cost of trading the security and the cost of searching for information. The lower these costs are, the greater the security's marketability.

What are over-the-counter markets (OTCs), and how do they differ from organised exchanges?

Securities that are not listed on an organised exchange are sold as OTC. An OTC market differs from an organised exchange in that there is no central trading location. OTC security transactions are made via phone or computer as opposed to on the floor of an exchange.

What effect does an increase demand for business goods and services have on the real interest rate? What other factors can affect the real interest rate?

An increase in the demand for business goods and services will cause the borrowing schedule to shift to the right, us increasing the real rate of interest. O factors that can affect the real interest rate include increases in productivity, changes in technology, or changes in the corporate tax rate. Demographic factors, such as growth or age of the population, and cultural differences can also affect the real rate of interest.

How does the business cycle affect the nominal interest rate and inflation rate?

Both the nominal interest and the inflation rates tend to follow the business cycle; that is, they rise with economic expansion and fall during a recession.