6(a). First, distinguish between the compound interest rate and the simple interest rate; then

suppose that YOU have an initial endowment equivalent to $60,000 that is to be invested. Assuming that the current market interest rate is 5% and is expected to remain at this level for a long time, (i) what will be the expected values of your initial endowment at the end of one (1) year, ten (10) and twenty-five (25) years? Why are the expected values higher even though the interest rate remains the same over the stated periods?

(15 marks) 6(b). First, carefully describe the off-balance sheet activities that are used by banks to raise

additional revenues. Then, EVALUATE the statement that: "Whenever currency is deposited into the accounts of the private deposit-taking institutions, cash goes out of circulation and, as a result, the supply of money is decreased". Do you agree? Why? Why not? Explain carefully using the simple money supply model.