Question

1. Why do you think the financial system has become more globally integrated over time?  Can you think of any downside to this increased integration?

2. If offered the choice of receiving $1,000 today or $1,000 in one year’s time, which option would you choose, and why?

3. Suppose financial institutions didn’t exist but you urgently needed a loan. Where would you most likely get this loan? Using Core Principles, identify an advantage and a disadvantage this arrangement might have over borrowing from a financial institution. (LO2)

4.   You are the owner of a small sandwich shop. A buyer may offer one of several payment methods: cash, a check drawn on a bank, a credit card, or a debit card. Which of these is the least costly for you? Explain why the others are more expensive.

Answer 1

Ans: - (a) Over a period of time we have observed that the financial system has become globally integrated and one of the major factors is globalization. over a period of time we have realized that every country can't be good at manufacturing everything . Due to the geographical conditions, technology, natural resources some countries are good at something so rather than manufacturing those goods or services it is better to outsource or buy those goods or services because it will cost less to other countries. Nowadays Investors are not only investing in their countries but also in the country with a fast-growing economy and there are certain other factors which have led this whole world economy globally integrated.

The negative or downside of this globally integrated economy is that if something goes wrong in certain country then it causes a ripple effect throughout the global economy. one classic example is the 2007-2008 financial crisis of U.S.A which causes waves of economic and financial destruction or losses of investors of the whole world.

Ans-(b) If $1000 is offered today I will take it today and will not wait for one year because we all know that money depreciates over a period of time which means $1000 today will not have the same value after one year. Also if money is received today it can be invested in Bank or any Financial instruments which will give return after one year so there is opportunity cost also involved.

Ans:-(c) If the financial institutions are not available and you need an urgent loan then it is a high probability that you seek the help of relatives, family or friends. one advantage is that you don't have to guarantee your mortgage or collateral to seek a loan from your friends or family also it is likely that you may not have to pay an interest rate to your friends to take loan. one drawback is that you might have to pay the debt before time if your friend needs money from whom you have taken the loan or in other words, the loan is highly unstable.

Ans:-(d) In this scenario the cheapest, feasible and easy way for small shop owners to accept the payment method is by cash because you urgently get the money which you can use for other purposes. The other methods available here either time-consuming or expensive.

Cheque may not be convenient for small shop owners because they have to go the bank for clearance and it might be time-consuming and if the cheque is bounced due to insufficient balance then it will take more time. Similarly, payment through ATM cards i.e through debit or credit cards might not be the right choice for small shop owners because it will increase their operating cost because the bank will take certain charges for providing the services.

Therefore the best options for small shop owners to accept payment is by cash.