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- Solutions Manual for Financial Markets and Institutions 11th Edition by Jeff Madura
- Financial Markets And Institutions 11th Edition Jeff Madura Test Bank
- Financial markets and institutions
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Solutions Manual for Financial Markets and Institutions 11th Edition by Jeff Madura
Key Concepts 1. Explain the Loanable Funds Theory by deriving demand and supply schedules for loanable funds. Explain the Fisher Effect, and tie it in with Loanable Funds Theory by explaining how inflation affects the demand and supply schedules for loanable funds. Provide additional applications especially current events one at a time to help illustrate how events can affect the demand and supply schedules, and therefore influence interest rates.
Explain how forecasts of interest rates are needed to make financial decisions, which require forecasts of shifts in the demand and supply schedules for loanable funds. Introduce several possible events simultaneously to illustrate how difficult it can be to forecast interest rate movements when several events are occurring at once.
In some years such as , the fiscal budget deficit was large and interest rates were very low. When the federal government borrows large amounts of funds, it can crowd out other potential borrowers, and the interest rates are bid up by the deficit units. Use the Internet to learn more about this issue and then formulate your own opinion.
However, it does result in a large demand for funds, which will place upward pressure on interest rates unless there are offsetting forces. Questions 1. Interest Rate Movements. Explain why interest rates changed as they did over the past year. ANSWER: This exercise should force students to consider how the factors that influence interest rates have changed over the last year, and assess how these changes could have affected interest rates.
Interest Elasticity. Explain what is meant by interest elasticity. Would you expect federal government demand for loanable funds to be more or less interest-elastic than household demand for loanable funds? ANSWER: Interest elasticity of supply represents a change in the quantity of loanable funds supplied in response to a change in interest rates. Interest elasticity of demand represents a change in the quantity of loanable funds demanded in response to a change in interest rates.
Conversely, the quantity of loanable funds by consumers is more responsive to the interest rate level. Impact of Government Spending. If the federal government planned to expand the space program, how might this affect interest rates? ANSWER: An expanded space program would a force the federal government to increase its budget deficit, b possibly force any firms involved in facilitating the program to borrow more funds. Consequently, there is a greater demand for loanable funds.
The additional spending could cause higher income and additional saving. Yet, this impact is not likely to be as great. The likely overall impact would therefore be upward pressure on interest rates. Impact of a Recession. Explain why interest rates tend to decrease during recessionary periods. Review historical interest rates to determine how they react to recessionary periods. Explain this reaction. The demand for loanable funds decreases and interest rates decrease as a result.
Impact of the Economy. Explain how the expected interest rate in one year depends on your expectation of economic growth and inflation. ANSWER: The interest rate in the future should increase if economic growth and inflation are expected to rise, or decrease if economic growth and inflation are expected to decline.
Impact of the Money Supply. Should increasing money supply growth place upward or downward pressure on interest rates? ANSWER: If one believes that higher money supply growth will not cause inflationary expectations, the additional supply of funds places downward pressure on interest rates.
However, if one believes that inflation expectations do erupt as a result, demand for loanable funds will also increase, and interest rates could increase if the increase in demand more than offsets the increase in supply. Impact of Exchange Rates on Interest Rates. Assume that if the U. Based on this information, how might expectations of a strong dollar affect the demand for loanable funds in the United States and U. Is there any reason to think that expectations of a strong dollar could also affect the supply of loanable funds?
The expectations of a strong dollar could also increase the supply of funds because it may encourage saving there is less concern to purchase goods before prices rise when inflationary expectations are reduced. In addition, foreign investors may invest more funds in the United States if they expect the dollar to strengthen, because that could increase their return on investment.
Nominal versus Real Interest Rate. What is the difference between the nominal interest rate and real interest rate? What is the logic behind the implied positive relationship between expected inflation and nominal interest rates? The real interest rate represents the recent nominal interest rate minus the recent inflation rate.
Investors require a positive real return, which suggests that they will only invest funds if the nominal interest rate is expected to exceed inflation. In this way, the purchasing power of invested funds increases over time. As inflation rises, nominal interest rates should rise as well since investors would require a nominal return that exceeds the inflation rate. Real Interest Rate. Estimate the real interest rate over the last year.
If financial market participants overestimate inflation in a particular period, will real interest rates be relatively high or low? If inflation is overestimated, the real interest rate will be relatively high. Investors had required a relatively high nominal interest rate because they expected inflation to be high according to the Fisher effect.
Forecasting Interest Rates. Why do forecasts of interest rates differ among experts? ANSWER: Various factors may influence interest rates, and changes in these factors will affect interest rate movements. Experts disagree about how various factors will change. They also disagree about the specific influence these factors have on interest rates. Advanced Questions Impact of Stock Market Crises.
During periods when investors suddenly become fearful that stocks are overvalued, they dump their stocks, and the stock market experiences a major decline.
During these periods, interest rates also tend to decline. Use the loanable funds framework discussed in this chapter to explain how the massive selling of stocks leads to lower interest rates. ANSWER: When investors shift funds out of stocks, they move it into money market securities, causing an increase in the supply of loanable funds, and lower interest rates.
Impact of Expected Inflation. How might expectations of higher global oil prices affect the demand for loanable funds, the supply of loanable funds, and interest rates in the United States? Will this affect the interest rates of other countries in the same way? Since higher inflation can increase interest rates, it will cause an expectation of higher interest rates in the U. Firms and government agencies may borrow more funds now before prices increase and before interest rates increase.
Consumers may use their savings now to buy products before the prices increase. Therefore, the demand for loanable funds should increase, the supply of loanable funds should decrease, and interest rates should increase in the U.
If the country produces its own oil, it can set the oil prices in its country. If it can prevent high oil prices in its country, then the prices of products gasoline and services transportation may not be affected. Therefore, interest rates may not be affected.
Global Interaction of Interest Rates. Why might you expect interest rate movements of various industrialized countries to be more highly correlated in recent years than in earlier years? ANSWER: Interest rates among countries are expected to be more highly correlated in recent years because financial markets are more geographically integrated.
More international financial flows will occur to capitalize on higher interest rates in foreign countries, which affects the supply and demand conditions in each market. The international flow of funds caused this type of reaction. Impact of War. A war tends to cause significant reactions in financial markets. Why would a war in Iraq place upward pressure on U. Why might some investors expect a war like this to place downward pressure on U.
However, it may also cause some analysts to revise their forecasts of economic growth downward. The slower economy reflects a reduced corporate demand for funds, which by itself places downward pressure on interest rates.
If inflation was not a concern, the Fed may attempt to increase money supply growth to stimulate the economy. However, the inflationary pressure can restrict the Fed from increasing the money supply to stimulate the economy since any stimulative policy could cause higher inflation. Impact of September Offer an argument for why the terrorist attack on the United States on September 11, could have placed downward pressure on U.
Offer an argument for why that attack could have placed upward pressure on U. ANSWER: The terrorist attack could cause a reduction in spending related to travel airlines, hotels , and would also reduce the expansion by those types of firms. This reflects a decline in the demand for loanable funds, and places downward pressure on interest rates.
Conversely, the attack increases the amount of government borrowing needed to support a war, and therefore places upward pressure on interest rates.
Jayhawk Forecasting Services analyzed several factors that could affect interest rates in the future. Most factors were expected to place downward pressure on interest rates.
Financial Markets And Institutions 11th Edition Jeff Madura Test Bank
Explain the role of financial intermediaries in transferring funds from surplus units to deficit units. Provide a preview of the course outline. Emphasize the linkages between the various sections of the. Financial intermediaries benefit from access to information. As information becomes more.
Financial markets and institutions
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Key Concepts 1. Explain the Loanable Funds Theory by deriving demand and supply schedules for loanable funds. Explain the Fisher Effect, and tie it in with Loanable Funds Theory by explaining how inflation affects the demand and supply schedules for loanable funds.
Financial Markets and Institutions 12th edition Financial Markets and Institutions 12th edition Rent - Chegg. Copyright Published. Jeff Madura. Instructors, Want to Share This Product. Financial Markets and Institutions, 12th Edition - Cengage.
Financial markets finance much of the expenditures by corporations, governments, and individuals. Financial institutions are the key intermediaries in financial markets because they transfer funds from savers to the individuals, firms, or government agencies that need funds. Financial Markets and Institutions, 11th Edition, describes financial markets and the financial institutions that serve those markets. It provides a conceptual framework that can be used to understand why markets exist. Each type of financial market is described with a focus on the securities that are traded and the participation by financial institutions.