Question 1

1. Some countries do not have well-established market for debt securities or equity securities. Why do you think this can limit the development of the country, business expansion, and growth in national income in these countries?
2. When economic crises in countries are due to a weak economy, local interest rates tend to be very low. However, if the crisis is caused by an unusually high rate of inflation, the interest rate tends to be very high. Explain why?

Question 2

During periods when investors become fearful that stocks are overvalued, they try to get rid of their stocks and the stock market experience a major decline. During these periods, interest rates also tend to decline. Use the loanable funds to explain how a massive sell of stocks leads to lower interest rates.