Name: Date:
Graded Assignment
Unit Test Part 2: Money, Money, Money
Answer the following questions based on what you have learned.
(5 points)
Score
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.
(5 points)
Score
2. Describe a stock market bubble. Explain what causes a bubble, and why a crash generally follows a bubble.
(5 points)
Score
3. 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.
(5 points)
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4. What is buying on margin? Use an example to demonstrate how buying on margin enables currency traders to make large profits on small investments.
(5 points)
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5. What are futures contracts and forward contracts? Describe two differences between them.
Your Score ___ of 25
1. The discount rate is the rate at which the Federal Reserve lends money to banks. The Federal Reserve can raise the discount rate. Raising the discount rate leads to a reduction in the money supply because it becomes more expensive for banks to borrow money from the Federal Reserve, leading to less money circulating in the economy.
2. A stock market bubble is a situation in which stock prices are significantly inflated compared to their intrinsic value. This is often caused by excessive speculation and investor optimism. A crash generally follows a bubble because at some point, the market realizes that stock prices are not sustainable, leading to panic selling and a sudden drop in prices.
3. When one currency is rising against another currency, it means that it takes more units of the weaker currency to buy one unit of the stronger currency. Europeans benefit when the euro is rising against the dollar because their euros can buy more goods and services in the United States, making their vacations more affordable.
4. Buying on margin is when an investor borrows money from a broker to invest in stocks or currencies. For example, if an investor wants to buy $10,000 worth of a currency pair but only has $5,000, they can borrow the remaining $5,000 from the broker. If the currency pair increases in value, the investor can make a profit on the full $10,000 investment rather than just the $5,000 they initially had.
5. Futures contracts are standardized agreements to buy or sell a commodity or financial instrument at a set price on a specific date in the future. Forward contracts are similar but are customized agreements between two parties. One difference between them is that futures contracts are traded on exchange markets, while forward contracts are traded over-the-counter. Another difference is that futures contracts are settled daily, while forward contracts are settled at the end of the contract period.