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You are considering joining a stokvel, which is a savings mechanism widely used in South Africa.
Different schemes have different objectives, but the general principle is that members of the stokvel
make a monthly contribution to a central fund which is used to cover unusual expenses (such as a
funeral), or pay a ‘windfall’ to the members on a rotational basis. It is a form of mutual financial
assistance, which can be viewed partly as insurance, partly as a savings mechanism and partly as
a means of building social cohesion.            
You are mainly interested in the stokvel Mogodiso, which operates according to the rule that each
member contributes R150 per month. The money is banked in an account which receives monthly
interest payments of 0.75% per month. The members are paid out every two years only the sum of
their contributions (no interest), and they have the option of leaving the money in the stokvel.
Assume that you decide that you will leave the money in the stokvel, and withdraw the total amount
of your contributions after 10 years.            
An alternative option for you is that you contribute R150 per month to your own savings account
which makes an interest payment of 0.75% per month.        
Calculate the following, based on a period of 10 years:        
a. What will be the value of your contributions to Mogodiso at the end of 10 years?    
b. What will the future value be of your contributions to your savings account?    
c. What is the value of the difference and who will get this money? Why might it be important  
to you that you make this contribution?            

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Related questions

You are thinking about buying a house. You find one you like that costs $400,000. You learn that your bank will give you a mortgage for $320,000 and that you would have to use all of your savings to make the down payment of $80,000. You calculate that the mortgage payments, property taxes, insurance, maintenance, and utilities would total $1920 per month. Which of the following is true regarding your calculation of the cost of owning the house?

A. It should not include maintenance, since homeowners often use their own time to fix things around the house instead of calling a professional.

B. It should include your monthly income, since you must know the source of the money when trying to calculate costs.

C. It should include the opportunity cost of the money used to make the down payment. This money could be earning interest in a bank.

D. It should not include property taxes, since that is money that goes directly to the government and is no longer in the market.

Given the information above, if the interest rate on your savings account was 4% a year, then the yearly opportunity cost of using this money for a down payment would be equal to __?

Answer the two parts please. and show work.

Problem 2 (15 points)

Consider an economy with five assets: 1) Cash 2) Checking Accounts 3) Savings and Money-Market Accounts 4) Bonds 5) Stocks. M1 includes asset classes 1 and 2, and M2 is the sum of M1 and asset class 3. All else being equal, how would each of the following changes affect demand for M1? And for M2? Explain.

a) The stock market crashes, and investors who were previously excited about prospective gains now view it as too risky.

b) Authorities intensify the fight against street crime, leading to more arrests and convictions for robbery. As crime rates fall, people feel safer holding cash.

c) Banks introduce overdraft protection, under which funds are automatically transferred from savings to checking as needed to cover checks.

d) Due to an increase in inflation expectations, the average interest rate on bonds rises from 3% to 6%.

e) The government introduces deposit insurance, guaranteeing checking, and savings deposits in the event that there are depositor runs and banks fail.

Hint: Each change in a-e makes one asset more (less) attractive by raising (lowering) its return, liquidity, safety, or another desirable characteristic of the asset. You need to identify which asset's attractiveness has increased (decreased) and will thus absorb more (less) funds. As agents change their portfolios, there may be several possibilities regarding where funds come from (flow to). Thus, different answers may be correct, as long as you write a sentence explaining the move you have in mind. The emphasis of the question is on demand. That is, you just need to think through how an individual would reallocate funds between different available assets. Do not try to guess further equilibrium effects, i.e., do not worry about what would happen to prices and other behaviors that might follow if everyone in the economy did this move. That is interesting but beyond the scope of this problem. Also, assume that these are ceteris paribus changes, i.e., other factors do not change.

1.  The Federal Funds Rate is set by the Federal Reserve on the first business day of each month by faxing the rate to the member banks of each Federal Reserve District.

A. True

B. False

 

2. The Federal Reserve is a single Central bank located on Wall Street in New York City.

A. True

B. False

 

3. Which of the following is NOT true about the Federal Reserve System?

A. Terms of service of the members of the Board of Governors are longer than the number of years that a two-term President of the United States would serve.

B. The Federal Reserve System is the nation's central bank and is comprised of 12 Federal Reserve Banks that serve as bankers' banks.

C. Some of the main functions of the Federal Reserve System include the authority to control the money supply, to issue currency, to set reserve requirements, and to hold reserves.

D. While Congress controls the actions of the Federal Reserve, the President has the authority to appoint and remove private banks from the Federal Reserve System.

 

4. Which of the following is NOT true about restrictive monetary policy?

A. A restrictive monetary policy seeks to raise the federal funds rate.

B. A restrictive monetary policy seeks to expand the money supply.

C. A restrictive monetary policy seeks to raise the Federal Funds Rate by selling government bonds or raising the reserve requirement ratio or increasing the discount rate.

D. A restrictive monetary policy is used when the government is concerned about suddenly increasing inflation.

 

5. Which of the following statements is NOT true about contractionary fiscal policy?

A. Contractionary fiscal policy consists of reductions in government spending or increases in taxes.

B. Contractionary fiscal policy can include both reductions in government spending or increases in taxes.

C. Contractionary fiscal policy seeks to shift the Aggregate Demand curve to the right.

D. Contractionary fiscal policy is used when the government seeks to reduce suddenly surging inflation.

 

6. The Federal Reserve creates money by printing the amount of desired new money and distributing it via armored trucks and high-security railways to Federal Reserve District Banks.

A. True

B. False

 

7. If the Fed feared a looming recession was just around the corner, which of the following actions would it "NOT" consider?

A. The Fed would raise the discount rate.

B. In order to influence prevailing commercial interest rates to fall, the Fed would buy large amounts of government securities.

C. In order to expand the money supply (which influences prevailing commercial interest rates to fall), the Fed would either buy large volumes of government bonds, lower the reserve requirement or cut the discount rate.

D. The Fed would seek to expand the money supply because, in so doing, the federal funds rate would fall and that would stimulate commercial interest rates to fall.

 

8. Which of the following statements is NOT true about the ability of the Federal Reserve System to expand the money supply?

A. The Federal Reserve System uses the fractional nature of the banking system to create money in order to expand the money supply.

B. The money multiplier defines the relationship between new excess reserves throughout the banking system and the creation of money by banks in the system. It is calculated by dividing the number 1 by the Required Reserve Ratio. [1/rr].

C. If the required reserve ratio is 20%, then $80 billion in new excess reserves will create $400 billion in bank system lending throughout the entire banking system.

D. If the reserve requirement is 100%, then the banks can generate 100% in new excess reserves.

 

9. Which of the following is NOT true about the tools of monetary policy?

A. The Fed can alter the money supply through open market operations, changes in the reserve ratio or adjustments to the discount rate.

B. Lowering the reserve ratio would expand the money supply.

C. Raising the discount rate would restrict the money supply.

D. Adjusting the reserve requirement is the most important day-to-day method for controlling the nation's money supply.

 

10. If the Federal Reserve wishes to hold off a feared recession, it will sell large volumes of government bonds.

A. True

B. False

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