Reference no: EM131227648

1. Is everybody worse off when interest rates rise?

2. If I can buy a car today for $5,000 and it is worth $10,000 in extra income to me next year because it enables me to get a job as a traveling salesman, should I take out a loan from Larry the Loan Shark at a 90% interest rate if no one else will give me a loan? Will I be better or worse off as a result of taking out this loan? Can you make a case for legalizing loan sharking?

3. If you suspect that a company will go bankrupt next year, which would you rather hold, bonds issued by the company or equities issued by the company? Why?

4. The U.S. economy borrowed heavily from the British in the nineteenth century to build a railroad system. Why did this make both countries better off?

5. Why might you be willing to make a loan to your neighbor by putting funds in a savings account earning a 5% interest rate at the bank and having the bank lend her the funds at a 10% interest rate, rather than lend her the funds yourself?

6. In prison, cigarettes are sometimes used among inmates as a form of payment. How is it possible for cigarettes to solve the "double coincidence of wants" problem, even if a prisoner does not smoke?

7. Three goods are produced in an economy by three individuals:

If the orchard owner likes only bananas, the banana grower likes only chocolate, and the chocolatier likes only apples, will any trade between these three persons take place in a barter economy? How will introducing money into the economy benefit these three producers?

8. Why did cavemen not need money?

9. In ancient Greece, why was gold a more likely candidate for use as money than wine?

10. The table below shows hypothetical values, in billions of dollars, of different forms of money.

Use the table to calculate the M1 and M2 money supplies for each year, as well as the growth rates of the M1 and M2 money supplies from the previous year.
Why are the growth rates of M1 and M2 so different? Explain.