Grant Stenger
Assignment #2
1. (5 pts) What is the primary difference between financial instruments that trade in
money markets and capital markets?
The financial instruments used in capital markets would be stocks and bonds. While in
the money markets would be deposits, collateral loans, acceptances and bills of
exchange. Also money Markets are more liquid compared to capital markets.
2. (5 pts) What is a repurchase agreement?
a contract in which the vendor of a security agrees to repurchase it from the buyer at an
agreed price.
3. (5 pts) Why are secondary markets important to firms who issue equity shares?
the secondary markets create additional economic value by allowing more beneficial
transactions to occur. The net result is that almost all market prices are more efficiently
allocated because of secondary market activity.
4. (5 pts.) Explain why investors would be more willing to purchase a mortgage-back
security rather than a mortgage?
Its because a Mortgage Backed Security is a bond backed by home mortgages.
The mortgages are pooled together, and become bonds. A Mortgage Bond is
not backed by home mortgages, rather it is a corporate bond secured by some asset.
You have less risk with a MBS Bond.
5. (5 pts) What are pension funds’ sources of funds? What are their uses of funds?
Pension funds hold large amounts of corporate bonds and stocks. The funds generate
income to the worker upon retirement.
6. (5 pts.) Why is simply counting currency an inadequate measure of money?
Because money isn’t a currency, is it used to buy goods and services. Counting currency
you are not getting anything that can be used to buy a good or service.
7. (5 pts.) 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?
Its their currency. So the inmates with the cigarettes that don’t smoke can use the
cigarette to barter or trade it for something he needs or wants. Cigarettes satisfy the
double coincidence of wants in that both parties to a trade stand ready to use them to
purchase a good or service.
8. (5 pts.) A recent study claims that ramen noodles are replacing cigarettes as the pri-
mary medium of examples (See Washington Post article, “ ‘They’ll kill for it’: Ramen has
become the black-market currency in American Prisons.” What does the article cite as
the major reason why ramen has emerged as money in prisons? Why is ramen not used
as money outside of prisons?
Prisoners said they were receiving food deemed "inedible or too little to sustain them
for a day." so food became more popular and then used as currency. “You can tell how
good a man’s doing [financially] by how many soups he’s got in his locker. ” Stated from
the article. Ramen isn’t used outside of prison because we aren’t limited to what food
we can consume. We are able to buy whatever food we would like.
9. (5 pts.) In Brazil, a country that underwent a rapid inflation before 1994, many trans-
actions were conducted in dollars rather than in reals, the domestic currency. Why?
It is because of the rapid inflation the domestic currency was a poor store of value.
Many people preferred to hold dollars, which were a better store of value.
10. (5 pts.) Was money a better store of value in the United States in the 1950s than in the
1970s? Why or why not? In which period would you have been more willing to hold
money?
Our money was losing value at a slower rate (due to inflation) in the 1950 compared to
the 1970s. it became a better store of value which made you hold your money longer.
11. (5 pts.) Rank the following assets from (1) most liquid to least liquid(6).
a. Checking account deposits (2) b. Houses (6)
c. Currency (1) d. Automobile (5)
e. Savings deposit (3) f. Common stock (4)
12. (5 pts.) Suppose that you are interested in earning some interest on idle balances that
you usually keep in your checking account and decide to buy some money market
mutual fund shares by writing a check. Describe the affects of this transaction on M1
and M2.
M1 will decrease, and M2 will stay the same.
13. (5 pts.) Go to [Link]/releases/h6/Current/, which shows the Fed’s
U.S. Money Stock Measures.
1. (a) What is the growth rate of M1 and M2 over the 12-month period ending in
December 2018? (Use the Seasonally-adjusted data.)
M1: 5.0%
M2: 4.5%
2. (b) Does this seem expansionary or contractionary to you?
Expansionary because the money supply was growing and they were stimulating
the economy.
14. (5 pts.) Prior to the Civil War, the money supply consisted of what? Indicate whether
each item was legal tender or not.
They used silver, gold was legal tender. They also used pennies and bank issue notes but
weren’t legal tender.
15. (5 pts.) What were the three primary objectives of the National Bank Act of 1863?
Three primary objectives would be create a national banking system, float federal war
loans, and establish a national currency.
16. (10 pts.) The Coinage Act of 1834 changed the silver-to-gold weight ratio from 15-to-1,
where it had been set in 1792, to 16-to-1. In particular, a dollar was defined as 371.25
grains of silver or 23.2 grains of gold.
Therefore, the U.S. Mint would coin silver at a rate of $0.041/gram and gold at a rate of
$0.67/gram. This meant that each $10 Eagle contained 15 grams of gold and each Silver
$1 contained 24.06 grams of silver.
The market gold-silver price ratio was approximately 15.625 at this time. Using an
example like we discussed in class, explain why Milton Friedman concluded, “In any
event, the adoption of the 16 to 1 ratio ... spelled the end of the reign of silver.” (In
other words, silver was no longer used as money.)
You may find it helpful to start by supposing that you need to pay a $100 debt.
$10 in gold is worth $10.05. while $1 of silver is $.99