1. Why are financial markets important to the health of the economy? 2. When interest rates rise, how might businesses and consumers change their economic behaviour?

3. How can a change in interest rates affect the profitability of financial institutions?

4. Is everybody worse off when interest rates rise?

5. What effect might a fall in stock prices have on business investment?

6. What effect might rise in stock prices have on consumers decisions to spend?

7. How does a decline in the value of the pound sterling affect British consumers?

8. How does an increase in the value of the pound sterling affect American businesses?

9. How can changes in foreign exchange rates affect the profitability of financial institutions? 10. Looking at Figure 1.3, in what years would you have chosen to visit the Grand Canyon in Arizona rather than the Tower of London? 11. What is the basic activity of banks? 12. What are the other important financial intermediaries in the economy besides banks? 13. Can you think of any financial innovation in the past 10 years that has affected you personally? Has it made you better or worse off? In what way? 14. What types of risks do financial institutions face? 15. Why do managers of financial institutions care so much about the activities of the Federal Reserve System?