Define the discount rate. Tell who can raise the discount rate. Explain how raising the discount rate leads to a reduction in the money supply.

(5 points)

Score

3

1. Define the discount rate. Tell who can raise the discountrate. Explain how raising the discount rate leads to a reduction in the moneysupply.

In banking the discount rate refers tothe interest rate charged to commercial banks and some other depositoryinstitutions for loans received from Federal Reserve Bank discount window. Infinance the discount rate refers to interest rate used in discounted cash flowanalysis to determine the present value or future cash flow.The discount ratecan be raised by the Federal Reserve Bank.

The Federal Reserve affect the moneysupply via the discount rate as the amount of lending that goes on in theeconomy will change accordingly. Discount rate affects the commercial interestrates and therefore has an impact on the loans issuance and money supply.

PLEASE ANSWER THIS ADDITIONALY Whathappens when discount rate is raised?

(5 points)

Score

5

1. Describe a stock market bubble. Explain what causes abubble, and why a crash generally follows a bubble.

Stock market bubble is a sort ofeconomic bubble in stock markets occurring when market participants drive stockprices above their value according to a particular stock valuation.

A stock bubble is caused by an economiccycle, with a rapid expansion occurring and followed by a contraction. Thecrash is generally followed by a bubble since the investors are too eager tosell off and at some point the prices are not justified by the value.

(5 points)

Score

5

1. Describe what it means for one currency to be rising againstanother currency. Explain how Europeans vacationing in the United Statesbenefit when the euro is rising against the dollar. 

When one currency is raising againstanother it means there is an increase of value in one currency against another.The currencies change the value for reasons such as capital inflows, and thestate of a country’saccount at the given moment.

When euro is rising against the dollarit means that when one exchanges the money you would get more dollars per euro.That situation is particularly beneficial for tourists coming from Europe tovisit USA.

(5 points)

Score

5

1. What is buying on margin? Use an example to demonstrate howbuying on margin enables currency traders to make large profits on smallinvestments.

Buying on margin means purchasing anasset with a down payment and financing the balance through a loan by using theasset as the collateral.

Example: Suppose you buy a house at apurchase price of $100,000 and you put 10 percent down, your equity (what youown) is $10,000 and the remaining $90,000 with a mortgage is borrowed. Supposethe value of the house rises to $120,000 and you sell the profit here will beof 100 percent (excluding closing costs). So,the $20,000 gain on the propertyrepresents a gain of 20 percent on the purchase price of $100,000, howeversince your real investment represents the sum of $10,000 (the down payment),your attain is of 200 percent (a gain of $20,000 on the initial investment of$10,000).

(5 points)

Score

5

1. What are futures contracts and forward contracts? Describetwo differences between them. 

Forward contract is a privatetransaction, it has credit risk and it is unregulated. It is aninformal agreement traded through a broker-dealer network to buy and sellspecified assets, typically currency, at a specified price at a certain futuredate

Futures contracts takes place on anorganized exchanged where all of the contracts terms and conditions exceptprice are formalized. Its standardalization helps to create liquidity inmarketplace. It is an agreement to buy or sell assets, especiallycommodities or shares, at a fixed price but to be delivered and paid for later.

Main differences between the two are:Future contracts are regulated by the federal government and forward are not;Future have no credit risk, but forwards do; Forwards are customized to client’s needs, but future are organizedexcept the price.