1. Various financial instruments usually serve one of two distinct purposes: to store value or to transfer risk. Name a financial instrument used for each purpose.

2. Many people believe that despite ongoing financial innovations, cash will always be with us to some degree as a form of money. What core principle could justify this view?

3. When you apply for a loan, you are required to answer lots of questions. Why? Why is the set of questions you must answer standardized?

4. Why do you think the global financial system has become more globally integrated over time? Can you think of any downside to this increased integration?

5. Could the dollar still function as the unit of account in a totally cashless society?

6. Give four examples of ACH transactions you Might make.

7. Under what circumstance might you expect barter to reemerge in an economy that has flat money as a means of payment? Can you think of an example of a country where this has happened recently?

8. While we often associate informal financial arrangements with poorer countries where financial systems are less developed, informal arrangements often coexist with even the most developed financial system. What advantages might there be to engaging in informal arrangements rather that utilizing the formal financial sector? LO1

Data Questions

1. Go to the FRED website (http://research.stlouisfed.org/fed2). Register to setup your own account. Doing so will allow you to save and update graphs, alter them for submitting assignments and making presentations, and receive a notice whenever the data is updated.

2. To begin using FRED, plot the consumer price index (FRED code: CPIAUCSL) and find the date and level of the latest observation. Then, plot the inflation rate measured as the person change from a year ago of this index.

3. Plot the level of real GDP (FRED code: GDPC1). Then, plot the rate of economic growth as the percent change from a year ago of this index. Describe how real GDP behaves in recessions, which are denoted in the FRED graph by vertical shaded bars. If you registered on FRED (as in Data Exploration problem 1 on the previous page), save the graph so that you recall and update it easily when new observations becomes available.

4. Examine nominal GDP (FRED code: GDP) by repeating the steps in Data Exploration problem 3. Based on the figure showing percent change from a year ago, what was special about the behavior of nominal GDP during the financial crisis of 2007-2009 compared to previous decades?

5. Plot on one figure the percent change from a year ago of both the GDP deflator (FRED code: GDPDEF) and real GDP (FRED code: GDPC1). How does the GDP deflator link nominal and real GDP? Since the mid-1980s, does it fluctuate more or less than real GDP?

6. Probably the most famous stock index is the Dow Jones industrial Average. Plot this index (FRED code: DJIA) over the period from 1960 to the present. LO2

7. Plot the percent change from a year ago of the Dow Jones Industrial Average (FRED code: DJIA). Discuss the behavior of changes in the index before, during, and after recession periods, which are indicated by the vertical, Shaded bars in the graph. LO2

8. Do changes in stock values affect the wealth of households? Beginning in 1960, plot on a quarterly basis the percent change from a year ago of the Dow Jones Industrial Average (FRED code: DJIA) and the percent change from a year ago of household net worth (FRED code: TNWBSHNO). Compare the two lines.