a)
The rank of assets from the lowest level to the highest level of transaction costs, risk, and liquidity when a bank deposits with a guaranteed interest rate.
a)
Explanation of Solution
The transaction costs for a bank deposit would be lower or equal to the share of a mutual fund because both components can be accomplished through a phone call, an online website, or by visiting a branch office.
The level of risk would be the lowest for the bank deposit because these deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to the amount of $250,000.
The level of liquidity would be highest for the bank deposit because withdrawals can only be made frequently.
Introduction: Financial system refers to a set of financial institutions that offers the exchange of funds, insurance, and deposits such as banks, insurance companies, etc.
Financial assets refer to the liquid assets that consider value from any ownership claim such as cash, bonds, stocks, etc.
b)
The rank of assets from the lowest level to the highest level of transaction costs, risk, and liquidity when a share of a highly mutual fund can be sold quickly.
b)
Explanation of Solution
The transaction costs for the share of a mutual fund would be equal to the bank deposit because both components can be accomplished through a phone call, an online website, or by visiting a branch office.
The level of risk, in this case, would be moderate even if there is diversification because the risk is associated with holding stocks while sharing a mutual fund.
The level of liquidity would be higher for the share of a mutual fund because it will take less time as compared to family members between selling shares and processing the payment.
Introduction: Financial system refers to a set of financial institutions that offers the exchange of funds, insurance, and deposits such as banks, insurance companies, etc.
Financial assets refer to the liquid assets that consider value from any ownership claim such as cash, bonds, stocks, etc.
c)
The rank of assets from the lowest level to the highest level of transaction costs, risk, and liquidity when a share of the family business can be sold only if there is a buyer and all other family members agree to the sale.
c)
Explanation of Solution
Transaction costs for the share of a family business would be highest because finding a buyer would consume time and resources.
Due to the share of the family business, the investment would not be diversified, therefore, there would be the highest risk.
The level of liquidity would be the lowest for the share of a family business because it can be sold only with the presence of agreement of other members of the family and also take time to find a buyer.
Introduction: Financial system refers to a set of financial institutions that offers the exchange of funds, insurance, and deposits such as banks, insurance companies, etc.
Financial assets refer to the liquid assets that consider value from any ownership claim such as cash, bonds, stocks, etc.
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Chapter 22 Solutions
Krugman's Economics For The Ap® Course
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