ECS 3701 ASSIGNMENT 1

1.01 When interest rates [1] decrease, businesses will decrease their investment spending. [2] increase, savers are worse off. [3] increase, borrowers benefit. [4] decrease, the cost of financing a house is lower. Due to a decrease in interest rates, consumers would be more likely to purchase a house or a car because the cost of financing their purchase is lower (as higher rates could deter one from borrowing to buy a house or car). On the contrary, higher interest rates could encourage individuals to save money as the cost of borrowing is higher. 1.02 What effect might a rise in stock prices have on consumers’ decision to spend? [1] They will be more likely to decrease their spending. [2] The change in prices may not affect their decision to spend. [3] They will be more likely to increase their spending. [4] The rise in stock prices will only affect businesses. Higher stock prices mean that consumers' wealth is higher and so they will be more likely to increase their spending. 3 1.03 Which one of the following statements regarding secondary markets is correct? [1] Prices in secondary markets determine the prices that firms issuing securities receive in primary markets. [2] Secondary markets make securities less liquid and therefore easier to sell in the primary markets. [3] Secondary markets are less important than the primary markets. [4] A secondary market is a financial market in which new issues of security are sold. A secondary market is a financial market in which securities that have previously been issued can be resold. Prices in secondary markets determine the prices that firms issuing securities receive in primary markets. In addition, secondary markets make securities more liquid and thus easier to sell in th