Chapter 1 Problems and Issues 1
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.
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