MGT411 Final Term Subjective

MGT411 FINAL TERM · SUBJECTIVE · BY ADNAN AWAN

Q49. What Discount rate is? (3 marks)

Answer

How is it controlled?

Answer

What is its impact on economy?

Answer

Provides short-term liquidity to bank in times of crisis and aids in controlling the federal funds rate

Q50. Why the aggregate demand curve slopes down? (3 marks)

ANSWER

1. First, because higher inflation reduces real money balances (thus reducing purchases),
2. Second, because higher inflation induces policymakers to raise the real interest rate, depressing various components of aggregate demand.

Q51. “Central bank can stabilize the economy”. Discuss. (5 marks)

Answer

Central bank can play a very important role in the economic development of any country because

1. It is responsible for conducting monetary policy.
2. Monetary policy controls money supply and also determines price level.
3. This inflation control can impact employment and hence it impacts the economic growth in the country.
4. Economic development of Pakistan is also possible because Central bank also maintains the stability of the national currency and improves trade balance by impacting positively on exports.
5. The central bank has been described as "the lender of last resort", which means that it is responsible for providing its economy with funds , in this way the central bank prevents the country's banking system from failing.
6. Central bank is also the sole provider and printer of notes and coins in circulation.

Q52. How in the long run current output equals potential output? (5 marks)

Answer

1. In the long run, since current output equals potential output, real growth must equal growth in
2. Ignoring changes in velocity, in the long run, inflation equals money growth minus growth in
3. Though central banks focus on controlling short term nominal interest rates, they keep an eye on money growth
4. When they try to adjust level of reserves in banking system to maintain interest rate, it affects money growth. This in turn determines inflation

Q53. Which of the components of aggregate demand are sensitive and are not-sensitive to the aggregate demand? (5 marks)

Answer

1. Investment is the most important of the components of aggregate demand that are sensitive to changes in the real interest rate.
2. An investment can be profitable only if its internal rate of return exceeds the cost of borrowing.
3. Consumption also responds to the real interest rate as sensitive.
4. Consumption decisions often rely on borrowing, and the alternative to consumption is saving (higher rates mean more saving).

As for net exports, when the real interest rate in a country rises, her financial assets become attractive to foreigners, causing local currency to appreciate, which in turn means more imports and fewer exports (lower net exports) So considering consumption, investment, and net exports, an increase in the real interest rate reduces aggregate demand (the effect on government spending, is small enough to be ignored).

Q43. What is the source of Trading risk, Credit risk and Liquidity risk? (3 marks)

Answer

Liquidity risk

Liquidity risk is the risk of a sudden demand for funds and it can come from both sides of a bank’s balance sheet (deposit withdrawal on one side and the funds needed for its off-balance sheet activities on the liabilities side If a bank cannot meet customers’ requests for immediate funds it runs the risk of failure; even with a positive net worth, illiquidity can drive it out of business

Trading risk

Banks today hire traders to actively buy and sell securities, loans, and derivatives using a portion of the bank’s capital in the hope of making additional profits However, trading such instruments is risky (the price may go down instead of up); this is called trading risk or market risk Managing trading risk is a major concern for today’s banks, and bank risk managers place limits on the amount of risk any individual trader is allowed to assume Banks also need to hold more capital if there is more risk in their portfolio

Credit risk

This is the risk that loans will not be repaid and it can be managed through diversification and Credit-risk analysis Credit-risk analysis produces information that is very similar to the bond-rating systems and is done using a combination of statistical models and information specific to the loan applicant

Q50. Give an account of different components of aggregate demand? (3 marks)

Answer

1. Consumption,
2. Investment,
3. Government purchases,
4. Net exports

the real interest rate. Consumption and net exports also respond to the real interest rate;

Q57. Discuss different types of insurance companies in detail. (5 marks)

Answer

Insurance companies

Accept premiums, which they invest in securities and real estate in return for Promise to compensate the policy holder incase of any events occurs like fire, Accident, death etc There are two type of in Insurance companies

1. Life insurance

2. Property and casualty insurance

Which makes a payment to the insured’s beneficiaries upon the death of the policy holder. Company can get group insurance for their employees.

Whole life insurance

It is combination of life insurance and fix saving account. We pay fix amount for a fixed period of time and in case of death of Policy holder his/her beneficiary gets the money. If the policyholder decides to discontinue the policy

Property and casualty Insurance

The policyholder pays fixed amount in exchange for protection to its property or Assets. For example Insuring the building against the fire. Insurance of house for theft. auto insurance.

Q56. What is the difference between corporate banking and Enterprise banking? (5 marks)

Answer

Corporate Banking

Corporate banking means Financing to corporate institutions which have been declared as corporate entity. Corporate entity means if more than one company falls in the same line of business, financing terms will be same to all the corporate institution as whole.

Enterprise banking

Enterprise banking means each individual business units will be covered separate, according to the specific requirements for financing. Though more than one company falls in the same group, the financing terms will differ according to each enterprise demands and needs