Assignment No.

1
Submitted To : Sir Sohail
Submitted By : Muhammad Abdullah
Roll No. : 20E-UOC/ECO-12
Department : BS Economics
Semester : 6th
Subject : Financial Economics
Title : Answer the Following
Question

1
 FINANCIAL ECONOMICS

Q: What effect might a fall in stock prices have on business investment?

When the price of a company's stock goes down, it raises less money and therefore less investment
in plants and equipment.
Explanation:
An investment is an asset or item purchased for the purpose of generating an increase in income
or capital. The importance of an investment is primarily to earn additional sources of income or to
make a profit from the investment over a period.
Stock price is the price of shares of a company issued by the public ownership. Higher the stock
price higher will be the reputation of the industry in the market and vice-versa. When the stock
prices are high industry will receive high investment.
Q: Explain the main difference between a bond and a common stock?

Stocks give you some of the ownership of the company, but bonds are loans from you to the
company or the government.

Explanation:

Financial markets are specialized markets for trading securities such as stocks, bonds, currencies,
bills and checks, and derivatives.

Stocks (also known as equity) are securities that represent ownership of a portion of a company.
Some companies provide dividends to their shareholders.

A bond is an instrument used by organizations to raise capital. Different types of bonds can be
corporate bonds, government bond, etc. A bond is an agreement that the organization owes the
lender to pay them interest and the principal amount on the maturity of bond.

Q: Explain the link between well-performing financial markets and economic

growth. Name one channel through which financial markets affect economic
growth and poverty?

Spillover affects the economic growth and poverty of a nation.

2
Explanation:

Financial markets can be defined as market systems where financial services are provided and the
exchange of financial securities takes place. This market acts as a medium for borrowers who need
funds and lenders who have excess funds.

Financial markets that are doing well allow capital to be channeled to the most efficient uses
possible. It will stimulate growth if funds are used in the most effective way possible. A high rate
of growth has an impact on all aspects of the economy and, because of spillover effects, reduces
poverty.

Q: What is one of the reasons for inflation in your country? Provide empirical
evidence to support your answer?

The excess demand in response to the supply gives rise to inflation.

Explanation:

Inflation is the situation of sustained increase in the general price level. It leads to a decline in the
value of money holdings.

In the case of developing nations like ours, the major reason of inflation is demand pull inflation.
Demand-pull inflation occurs when there are insufficient items or services to meet demand, leading
prices to rise. Demand has a positive relationship with inflation, higher the excess demand higher
will be the price of the commodity which will accommodate inflation in near future.

Q: When interest rate decreases, how might businesses and consumers change
their economic behavior?

The investment and spending will increase with the decrease in interest rate.
Explanation:

The interest rate is the factor payment of capital used by the borrower. It is paid by the borrower
to the lender. The higher the interest rate costly will be the borrowings and vice versa.

Decrease in interest rate makes the borrowings cheap and increases the demand of loan for
investment, this increases the money supply into the economy. Increase in money supply will result
in higher production, manufacturing, higher income, higher profit and thus the national income
will increase.

3
Q: Is everybody worse off when interest rates rise?

Bank, lenders, and customers with saving deposits do not worse off when interest rate rises.

Explanation:

The interest rate is the percentage of a loaned sum that a lender charges the borrower as interest,
usually represented as an annual percentage. It also refers to the sum provided on deposits.

No, when interest rates rise, not everyone suffers. people who need to borrow funds for any
purpose are negatively because financing costs more; conversely, savers earn profit because they
can earn greater interest rates on their savings.