1. How can the provision of several types of financial services by one firm be b
ID: 358500 • Letter: 1
Question
1. How can the provision of several types of financial services by one firm be both beneficial and problematic? 2. In prison, cigarettes are sometimes used among inmates as a form of payment. How is it possible for cigarettes to solve the "double coincidence of wants" problem, even if a prisoner does not smoke? s. Retired persons often have much of their wealth placed in savings accounts and other interest-bearing investments, and complain whenever interest rates are low. Do they have a valid complaint? 4. What effect will a sudden increase in the volatility of gold prices have on interest rates? s. How might a sudden increase in people's expectations of future real estate prices affect interest rates?Explanation / Answer
1. Financial services encompass various types of services including credit card companies, insurance companies, investment funds,banks, accountancy, consumer finance companies, stock brokerage companies aand so on. Providing various financial services is beneficial as they can cater tovarious groups and segments of customers based on their tastes and preferences. Customers will get wide variety of options and they would look forward where everything would be served under one roof.
It is also a problem as managing a wide product portfolio would create numerous problems and disturbances for the company.
2. In prison, cigarettes is used among inmates as a form of payment.It would serve the double coincidence of wants as most of the inmates smoke and they have strong inclination towards cigarettes. They can exchange cigarettes in return with other commodities which they need.If any inmate doesnt smoke, he can further exchange it with another prisoner who actually smokes.Thus the barter transaction takesplace in the prison in the absence of money.
3. Retired persons do not have a regular salary coming in. Moreover they dont have any other source of income. So they completely rely on their savings and the interest earned on such savings.So if the interest rate is low, they have a valid complaint as it affects their lifestyle and their only source of income.
4. Interest rates would fall if there is a sudden increase in the volatility of gold prices. Due to a sudden increase in the gold prices, the bonds become relatively less risky compared to gold and thus the overall demand of bonds increases. Thus the demand curve shifts rightwards, causing the bond priceto rise and the interest rate falls.
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