Oxford Exchange Rate Between US Dollar and Mexican Peso Discussion

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I need an IP and an IR, here are the definitions:

  • IP. An initial post (IP) from each student, which is the equivalent of homework question presented to a face-to-face class and
  • IR. Dialogue posts, called inquiry and reflection posts (IR) which take the place of class discussion in a face-to-face class and follow the form of a web conversation. For each discussion, all students must write both an initial post and an inquiry and reflection post, yes you can do more than one IR post. Your discussion grade will depend on each of these components. Your IR post must be in response to an IP posting by another student. If there are no responses to your IP by the closing time for IR posts you don’t need to write an FP post.

Answer ONE of the questions below and respond to the post from Dhruv Mathur (posted below):

  1. Consider Figure 4, Section 1.3 “Why Study Money and Monetary Policy” on page 9 of your textbook which shows the pathway of price levels and M2 over time. Based on your knowledge of Economics and/or prior learning, answer the question, “What do you think the relationship is between M2 and the price level in the United States?” I know you have already looked at the picture in the text but, just for this moment, ignore the picture you see. Please describe it as “positive, negative, or no relationship.” Explain why you have this expectation.

  2. Please consider the following questions related to the international currency markets.
    1. a. Please obtain the exchange rate between the US Dollar (USD) and the Mexican Peso (MXN) over the past 30 days at https://finance.yahoo.com/quote/MXN%3DX?p=MXN%3DX. Has the Mexican Peso increased or decreased in value relative to the US Dollar? Describe and explain the relationship. The relationship may not be all that “clear cut” in that some swings in the exchange rate might be happening counter to the 30 day trend. Just do your best, maybe focus on the beginning and ending values.
    2. Is it easier or harder for US firms to export domestically produced goods and services to Mexico over the past month?
    3. Has the Polish Zloty (PLN) increased or decreased in value relative to the U.S. dollar over the past 60 months. Fully explain and document.

  3. Suppose I can buy a car today for $8,000 and the car is worth, over the next year, an extra $15,000 in income because it expands on my abilities as a travelling salesman.
    1. Is it rational for me to get a loan from Larry the Loan Shark at an 80% interest rate if nobody else will give me a loan? Fully explain, including calculations, why or why not. Include in your explanation any impact on overall economic activity. For this one instance you can ignore the time value of money and income tax rates.
    2. After drawing up your explanation, can you generalize from this example to make the case for legalizing loan sharking? If legalized what limits might you suggest on the practice as you currently understand it is conducted
    3. now. Go ahead have some fun with this part of the question.

Here is the post you need to respond to:

Student Dhruv Mathur‘s post:

Consider the broadly defined “financial system” of chapters 01 and 02. Please do each of the following:

Financial systems and their structure are extremely important to the overall economy. In fact, financial markets perform the function of channeling funds from households, firms, and governments that have excess funds by spending less than their income to those that have a shortage of funds. That being said the most important borrower-spenders are businesses and the government, however, households and foreigners also borrow to money as well.

Explain what is meant by “Direct Finance” and what types of firms engage in this, give 2 examples.

Direct finance is when individuals borrow funds directly from financial markets by selling securities. Securities are claims on the borrower’s future income or assets. Expanding on that, securities are considered assets for the person who is buying them, but liabilities for the person or firm that sells them. One type of firm that may engage in this type of financing is an automotive firm like Toyota. If Toyota needs to borrow funds to pay for a new factory to manufacture a new type of car, it could borrow money by selling bonds. Another type of firm that may engage in direct financing is a technology firm like Apple. If they were looking to ramp up production of a new product line they might issue equity (stocks) in order to raise funding.

Explain what is meant by “Indirect Finance” and what types of firms engage in this, give 2 examples.

Indirect finance is when a financial intermediary borrows funds from lender-savers and then uses these funds to make loans to borrower-spenders. This allows people who save frequently to be paired with those who have profitable investment opportunities. One of the main types of firms/people that engage in this is smaller-scale businesses. Often times these businesses don’t have the means of issuing debt or equity-like large corporations and utilize these intermediaries to receive funding. Additionally, entrepreneurs are also frequent users of indirect finance as they tend to receive loans from intermediaries like banks to initiate their ideas/business.

Explain how the following things encourage the functioning of financial intermediaries:

Transaction Costs – Transaction costs encourage the functioning of financial intermediaries. Transaction costs are time and money spent trying to exchange financial assets, goods, or services. Financial intermediaries can work to decrease transaction costs as these intermediaries have formulated expertise in keeping them at a minimum. Additionally, their large size allows them to take utilize economies of scale, which is the reduction in transaction costs per dollar of transactions as the size and number of transactions increases.

Risk Sharing – Risk sharing is the process of creating and selling assets with risk characteristics that people are comfortable with and then utilizing those funds by selling the assets to purchase other assets that are riskier. In terms of how this encourages the functioning of financial intermediaries, as a result of the low transaction costs of financial institutions, is that these institutions can help reduce the exposure of investors to risk. Moreover, financial intermediaries promote risk-sharing by helping individuals to diversify, in turn, lowering the amount of risk they are exposed to. Through diversification, this promotes a portfolio of assets whose returns may not always move together, thus promoting an overall lower risk.

Information Costs – be specific and include explicitly either moral hazard or adverse selection. – Information costs are another reason why financial intermediaries are in place. Many times in financial markets, one party does not know enough about the other party to make accurate decisions. This lack of information creates problems in the financial system before the transaction is entered into as well as afterward. The premise of financial intermediaries works to aid the issues of moral hazard or adverse selection by serving as the middle ground. Moral hazard is the risk that one party in a transaction will engage in undesirable behavior from the other party’s point of view. Financial intermediaries mediate this problem, as small savers can allocate their funds to the markets by lending to these trustworthy intermediaries. Additionally, adverse selection is a problem created by asymmetric information prior to a financial transaction. Overall, financial intermediaries actively work to alleviate these information costs.