If we lived in an economy where interest rates were highly volatile, would you expect the maximum asset to capital ratio that a regulator would allow to increase or decrease and why?
What will be an ideal response?
An environment where interest rates are highly volatile means that the value of a firm's assets would also be volatile. For example, if interest rates significantly rise unexpectedly, the value of a bank's assets would fall unexpectedly. This would put a strain on the capital of the bank, especially in the sense that the bank's capital is the cushion that it would fall back on should it face a liquidity crisis. The bank could find itself insolvent if interest rates rise a lot and its capital was inadequate. As a result, we would expect regulators to insist on a lower asset to capital ratio.
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A devaluation of the home currency
A) makes foreign goods and services cheaper relative to those sold at home. B) makes domestic goods and services more expensive relative to those sold abroad. C) decreases demand and output. D) increases demand for domestic goods and services. E) increases output and makes domestic goods and services cheaper relative to those sold abroad.
The absolute price of a good is its
A) relative price. B) money price. C) subjective price. D) projected price.