Money & Banking

Much of the US government debt is held as treasury bonds and bills by foreign investors. How do fluctuations in the dollar exchange rate affect the value of that debt held by foreigners? The book states a strong dollar would benefit American consumers by making foreign goods cheaper, however this hurt American businesses and eliminated some jobs by cutting domestic and foreign sales of their products. A strong dollar means the US goods exported abroad will cost more in the foreign countries, therefore foreigners would buy less of them.

In 2008 as a financial crisis began to unfold in the United States, the FDIC raised the limit on insured losses to bank depositors from $100,000 per account to $250,000 per account. How would this help stabilize the financial system? People with more than $100,000 in their savings accounts had little to no reason to fear a bank failure, and were less expected to withdraw their funds. This helped keep money in the banks, which sequentially helped banks stay rich. The more prosperous banks there were, the more credit there was available for households and businesses that may been in need.

In September 2008, the growth rate of the M1 money supply was zero, while the growth rate of the M2 money supply was about 5%. In July 2009, the growth rate of M1 was about 17%, and the growth rate of M2 was about 8%. How should Federal Reserve policymakers interpret these changes in the growth rates of M1 and M2? Changes are not a serious problem for long run actions of the money supply, because changes for short-run actions tend to cancel out. Changes for long-run actions, for example one year growth rates, are therefore usually rather small.

If interest rates decline, which would you rather be holding, long term bonds or short term bonds? Why? Which type of bond has the greater interest rate risk? I would rather be holding long-term bonds. Their price would rise more than the price of the short-term bonds. This would give them a greater return. Longer-term bonds are much more subject to higher price fluctuations than shorter-term bonds. Therefore, they have greater interest rate risks.