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.

Dec 12th, 2015
Price: $10 USD

Question description

(5 points)



1.  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.

In banking the discount rate refers to the interest rate charged to commercial banks and some other depository institutions for loans received from Federal Reserve Bank discount window. In finance the discount rate refers to interest rate used in discounted cash flow analysis to determine the present value or future cash flow.The discount rate can be raised by the Federal Reserve Bank.

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

PLEASE ANSWER THIS ADDITIONALY What happens when discount rate is raised?

(5 points)



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

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

A stock bubble is caused by an economic cycle, with a rapid expansion occurring and followed by a contraction. The crash is generally followed by a bubble since the investors are too eager to sell off and at some point the prices are not justified by the value.

(5 points)



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

When one currency is raising against another 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 the state of a country’s account at the given moment.

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

(5 points)



1.  What is buying on margin? Use an example to demonstrate how buying on margin enables currency traders to make large profits on small investments.

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

Example: Suppose you buy a house at a purchase price of $100,000 and you put 10 percent down, your equity (what you own) is $10,000 and the remaining $90,000 with a mortgage is borrowed. Suppose the value of the house rises to $120,000 and you sell the profit here will be of 100 percent (excluding closing costs). So,the $20,000 gain on the property represents a gain of 20 percent on the purchase price of $100,000, however since 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)



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

Forward contract is a private transaction, it has credit risk and it is unregulated. It is an informal agreement traded through a broker-dealer network to buy and sell specified assets, typically currency, at a specified price at a certain future date

Futures contracts takes place on an organized exchanged where all of the contracts terms and conditions except price are formalized. Its standardalization helps to create liquidity in marketplace. It is an agreement to buy or sell assets, especially commodities 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 organized except the price.

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School: Purdue University

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Dec 12th, 2015
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