This assignment will assess your knowledge and skills about:

1. Explaining how businesses and households raise, manage, and allocate financial capital and the trade-offs involved in economic decision-making.
2. Describing the functions of money and how fractional reserve banking creates the money supply and affects economic policy.
3. Discussing the impact of exchange rate policies, international capital flows, and digital finance innovations like cryptocurrencies on economic outcomes.

Assignment: Understanding Modern Financial Systems

Assignment Instructions

Please read the three scenarios carefully and answer the questions that follow to demonstrate your understanding of modern financial systems.

Assignment

Scenario 1: Assume that a new technology startup is launching its innovative product. To scale operations, the company needs to raise funds and is considering a mix of angel investments and venture capital. Potential investors must evaluate the risks and returns of supporting this new venture.

Question 1

Explain how the startup can raise, manage, and allocate financial capital, and analyze the trade-offs involved in its economic decision-making.

Scenario 2: In your countryor another country of your choice (Canada)research the current inflation rate and examine its implications for the economy.

Question 2

Based on your findings, discuss whether the central bank should increase or decrease reserve requirements, and explain how this adjustment would affect the money supply and overall economic stability.

Scenario 3: Assume that in an emerging market, the government recently shifted from a floating exchange rate to a hard peg to address persistent currency volatility and rising inflation.

Question 3

Based on this scenario, answer the following questions:

1. What impact is this policy likely to have on international capital inflows and outflows?
2. How might the shift to a hard peg affect cryptocurrency transaction volumes and adoption in the country?
3. In what ways could this policy decision influence the overall financial stability of the emerging market?

Submission Instructions

• Read the rubric on how your assignment will be graded.
• Your assignment should be a minimum of 750 wrads and not more than 1000 wards (not including the reference list or the title); double-spacedd in Times New Roman font, which is no greater than 12 points in size.
• Support your arguments and develop your ideas with high-quality, credible, relevant sources appropriate for the discipline and genre of writing.

Read

1. Greenlaw, S., Shapiro, D., & MacDonald, D. (2022). Principles of Economics (3e ed.). https://openstax.org/books/principles-economics-3e/pages/1-introductionlicensed by CC 4.0
   • Read Chapter 17: Financial Markets https://openstax.org/books/principles-economics-3e/pages/17-introduction-to-financial-markets

• Section 17.1 - How Businesses Raise Financial Capital
• Section 17.2 - How Households Supply Financial Capital
• Section 17.3 - How to Accumulate Personal Wealth
• Section 17.1 explains how firms raise financial capital for long-term investments by leveraging early-stage funding, reinvested profits, bank loans or bonds, and issuing stock. It also discusses the trade-offs and decision criteria firms use when choosing between these financial sources based on risk, cost, and control.
• Section 17.2 describes how households supply funds by choosing among bank accounts, bonds, stocks, mutual funds, and tangible assets based on expected return, risk, and liquidity. It also explains the intermediary role of banks, offers methods to calculate bond yield, contrasts asset types, and discusses the tradeoffs between return and risk.
• Section 17.3 explains how the random walk theory reveals that stock prices move unpredictablywith an overall upward trendmaking consistent market outperformance highly unlikely. It also describes the impact of simple versus compound interest on wealth accumulation and evaluates how capital markets repackage financial capital to drive economic growth.
• Read Chapter 27: Money and Banking
• Section 27.1 - Defining Money by Its Functions
• Section 27.2 - Measuring Money: Currency, M1, and M2
• Section 27.3 - The Role of Banks
• Section 27.4 - How Banks Create Money
• Section 27.1explains the four key functions of moneyas a medium of exchange, store of value, unit of account, and standard of deferred paymentto overcome the inefficiencies of barter. It also contrasts commodity money, which has intrinsic value through non-monetary uses, with fiat money, whose value is derived solely from government decree and public trust.
• Section 27.2explains the differences between M1 and M2 money supplies by highlighting how liquidity distinguishes highly accessible assets (cash, checkable deposits, and savings) from less liquid ones (time deposits, certificates of deposit, and money market funds). It also discusses how evolving banking practices and technology blur these lines, emphasizing the central role of the banking system in measuring and managing the overall money supply.
• Section 27.3explains how banks function as financial intermediaries by pooling deposits from savers and lending to borrowers, thereby reducing transaction costs and supporting economic transactions. It also evaluates the roles of savings institutions and credit unions while analyzing how loan defaults and asset-liability mismatches contribute to bank bankruptcies and recessions.
• Section 27.4explains how banks expand the money supply by using the money multiplier formula and T-account balance sheets to show how limited reserves enable successive rounds of lending. It also discusses the benefits and risks of fractional reserve banking, highlighting how reserve requirements and depositor behavior affect overall money creation.
• Read Chapter 29: Exchange Rates and International Capital Flows
• Section 29.1 - How the Foreign Exchange Market Works
• Section 29.2 - Demand and Supply Shifts in Foreign Exchange Markets
• Section 29.3 - Macroeconomic Effects of Exchange Rates
• Section 29.4 - Exchange Rate Policies
• Section 29.1 explains the structure and dynamics of the foreign exchange market, defining key concepts and differentiating between investment types such as FDI, portfolio investments, and hedging. It also discusses how currency appreciation and depreciation affect exchange rates and identifies which economic participants benefit from a stronger or weaker currency.
• Section 29.2 explains how the foreign exchange market operates as buyers and sellers interactshifting supply and demand based on expectations, interest rate differences, and inflationto determine equilibrium exchange rates. It discusses the roles of arbitrage and purchasing power parity in ensuring that currency values reflect the relative prices of internationally traded goods, facilitating meaningful economic comparisons.
• Section 29.3 discusses how exchange rate volatility can disrupt international loans and banking stability, potentially triggering economic instability.
• Section 29.4 explains the spectrum of exchange rate policiesfrom floating rates to soft pegs, hard pegs, and merged currenciesand outlines how each regime functions along with its inherent tradeoffs. It describes the impact of these policies on monetary autonomy, exchange rate stability, and international trade, enabling you to differentiate among them and understand their economic implications.

1. Diyorbek, X., Ibrohimbek, K., & Ozodbek, T. (2024). Cryptocurrency adoption and its role in reshaping international financial systems. Journal of International Accounting and Financial Management, 1(1), 28-33. http://economicjournals.org/index.php/JIAFM/article/view/9/12 licensed by CC 4.0

• The article examines how Bitcoin and other cryptocurrencies are gaining global acceptance and transforming traditional financial systems through benefits such as lower transaction costs and enhanced security, while also addressing regulatory challenges and regional disparities in adoption. It concludes that the long-term success of crypto and decentralized finance (DeFi) depends on harmonized regulations and technological advancements.