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None of the following statements are correct. In each case, identify the error and correct the statement.
1. None of the following statements are correct. In each case, identify the error and correct the statement. a. A household’s current savings includes its current purchases of corporate stock as well as prior holdings of corporate stock and its current investment includes the equity it currently has in its house.b. The change in a household’s wealth over a quarter is given by its wealth at the beginning of the quarter plus its savings during the quarter.c. The ability of a household to borrow money from a bank to purchase a new PC is an example of the payments function of the financial markets, while the ability of the bank to make the loan is an example of the liquidity function.d. The ability of Treasury bills to retain their value over time is an example of the savings function of the economy, while the ability of a household to sell a Treasury bill on short notice with little risk of loss is an example of the liquidity function.e. The ability of the Federal Reserve to manipulate interest rates is an example of the policy function of the financial markets, while the ability of households to earn interest on those investments affected by the Fed’s decision is an example of the risk-protection function of the financial markets.2. George Wilkins checked the spreadsheet where he keeps track of his assets and liabilities. He discovered that (i) he owes $80,000 on his house, which he believes to be worth $150,000; (ii) his car is worth $20,000, against which there is $2,000 on the remaining bank loan; (iii) his stock portfolio has risen to $50,000; (iv) he has a $10,000 balance in his bank account, which is earning a 1.2 percent annual interest rate; and (v) the value of his other belongings is $45,000. He has just received his monthly paycheck for $6,000 and he is trying to decide about taking a vacation and whether or not to pay off his car loan. His monthly expenses are $3,000 which includes the interest expense on his auto loan. He has two possible vacation choices: the Bahamas for $2,000 or a local beach for $1,000. If he has any money left over at the end of the month, it will go into his bank account. If he doesn’t have enough money to cover all of his expenses for the month, he will sell enough of his stock to cover the excess expenses.a. Use a spreadsheet to input each of George’s assets, (i) to (v), in the first column; the value of these assets in the second column; and the liabilities (if any) against those assets in the third column. In the fourth column compute the net asset value of each of the assets. Total the fourth column to determine George’s net worth at the beginning of the month.b. Compute the additional net income that George will have from his paycheck plus the interest on his bank account minus the monthly expenses. Use this information to answer parts (c) through (f) below.c. Repeat part (a) for the end of the month assuming George does not take a vacation and pays off his auto loan.d. Repeat part (a) for the end of the month assuming George takes the Bahamas vacation and only pays $1,000 on the principal of the auto loan.e. Repeat part (a) for the end of the month assuming that George takes the local beach vacation and pays off his auto loan.f. Repeat part (a) for the end of the month assuming George takes the Bahamas vacation and pays off the auto loan.3. James Jenkins walks into a Big Box electronics store in search of a new HDTV. He finds exactly what he wants. The price is $2,000 and the HDTV has a $100 maintenance contract that ensures against component failures. He has $1,000 in cash, $3,500 in his checking account that pays 2 percent interest, a credit card with a 7 percent interest charge on unpaid balances, and a savings account paying 5 percent (all annual rates). Discuss which of the functions that the money and capital markets perform are important to Jim Jenkins as he considers various options for purchasing the HDTV.4. What would happen to the purchasing power of the U.S. dollar if the base period for the cost of living index were 1980 = 100 and the index reached the following levels in the indicated years?a. 1985—116b. 1990—127c. 1995—134d. 2000—151e. 2005—1707. Jack and Jill are small business owners who run a hot dog stand licensed to operate outside a business shopping district. They have been so successful that they believe a second hot dog stand in the area also would be profitable. The capital expense to set it up would be $10,000 and they are considering several options. Use a spreadsheet to evaluate these options by inserting (i) their receipts in column 1; (ii) expenses in column 2; (iii) change in financial assets in column 3; and (iv) change in their debt in column 4. State whether they would be a surplus-budget unit or a deficit-budget unit under each option.a. Their sales for the month turn out to be $12,000 and their expenses are $9,500; they borrow $10,000 for the new hot dog stand.b. Their sales for the month turn out to be $15,000 and their expenses $9,500; they sell $5,000 in stock and borrow the remaining funds needed to finance the new hot dog stand.c. Their sales for the month turn out to be $8,000 and their expenses are $9,500; they choose neither to borrow any funds nor build the second hot dog stand.d. Their sales for the month turn out to be $9,500 and their expenses also are $9,500; they use $5,000 in their bank account (with no other asset sales) to help finance the new hot dog stand.In the appendix to this chapter (especially Exhibit 3A.2 ) you are given household balance sheet information relating to the U.S. household sector’s financial assets and liabilities. Households also possess nonfinancial assets, the bulk of which is housing. Use the information presented below along with the information in Exhibit 3A.2 to examine how housing has affected U.S. household wealth since 1980. 2006$48,772.2 $65,705.925,780.419,926.1a. For each of the years: 1980, 1990, 2000, and 2006, please place into a spreadsheet the following information: Total assets, Total nonfinancial assets, Total housing, Total liabilities, and Total mortgages.B. For each year, determine what percentage of Total assets is made up of Housing.c. For each year, determine what percentage of Total liabilities is made up of Mortgages.d. For each year compute the net equity that U.S. households have in their home by subtracting Mortgages (liability) from Housing (asset).
