1. What does a negative interest rate mean? Why would a government intentionally have a negative interest rate (potential economic benefits)? If the interest rate was negative, why would savers (people or businesses) still put their money in banks or invest in government bonds? If the negative interest rate continued to decrease or lasted for a long period of time what would happen to the economy? How would having a very high interest rate for a long period of time impact our economy (consumer spending, loan availability, etc)?
2. Think about the following scenarios. Scenario 1) Inflation is very high and has been that way for several years. The president announces a plan to reduce inflation starting next year. What should happen to the interest rates if the public believes him? What will happen if the public does not believe him? Why would the public’s opinion have (or not have) an impact in interest rates? Scenario 2) During the past year bonds have were traded much more frequently than they had been in the past while to volume of trades in the stock market remained unchanged. How would this impact the interest rate on a bond and why? Scenario 3) The economy is very sluggish and companies having a hard time finding profitable opportunities. How would this impact the interest rate on a bond and why?
3. What was the primary cause of the 2007-2009 Financial Crisis? Briefly describe how moral hazard or adverse selection from 3 different parties (i.e. lenders, regulators, etc) led to the 2007 – 2009 Financial Crisis. Enough though the crisis started with just one sector, why did it effect the entire U.S. and even global economy? Why did the government bailout several large financial institutions even though they were partially responsible for the crisis? Other than the bailouts list two other things the government did to try and end the crisis. Do you think they were effective?
4. What is the primary difference between direct and indirect finance? Why are banks or private loans a more common source of external financing than the stock market? Briefly describe what a market for lemons means. What problems do information asymmetry cause in the financial markets? Why does anyone participate in the financial markets given these problems?