Financial Markets & Institutions Assignment #1

1. Why is the stock market so important to individuals, firms, and the economy? (At least 50 words)

2a. Explain the logic underlying the law of one price and the theory of purchasing power parity. (At least 75 words)

2b. How will a decrease in the federal government’s budget deficit affect the equilibrium interest rate in the bond market? Explain using the bond demand and supply framework. (At least 75 words)

3a. Distinguish between adverse selection and moral hazard. (At least 75 words)

3b. What are a bank’s major sources and uses of funds? (At least 75 words)

4a. Describe the structure and responsibility for policy tools in The Federal Reserve System. (At least 75 words)

4b. Describe what criteria is applied when choosing a policy instrument. (At least 75 words)

5. How is credit risk related to the concepts of adverse selection and moral hazard? (At least 100 words)