...C1 June 20, 2013 The Control of Money Supply & Demand of Money Today, we live in a world of scarcity where resources are limited and the choices one make has become so vital the economy. In the US, the government, the Federal Reserve, have control on the effect of supply and demand and money growth. As both supply and demand for money each depend on the interest rate, we specifically look at how inflation effects supply and demand on money. There are differences of money supply and demand for money; where it comes from and how it’s demanded. Given there are many variables that can effect money supply and the demand for money, we will focus on where it comes from and how inflation effects it. In the book, The General Theory of Employment, Interest, and Money by John Maynard Keynes, he explains liquidity factors in economic interest rates that balance supply and demand for money. There are two different types of interest rate that help explain, in monetary terms, how much borrowers pay for borrowed funds. Generally, during a period of inflation where prices increase, nominal interest can be misunderstood. As the nominal interest rate rises or falls, it can be misleading as to how much the borrower is truly borrowing and how much the lender is receiving. When the borrower repays the principle loan, they lender may not be able to purchase as much goods and services, then when originally loaned. This is because when the loan was initially issued the money was worth...
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...Since the discount rate controls the amount of money in the reserve it also affects interest rates on loans in the loanable funds market. A lower discount rate means more money supply which also means a lower interest rate. A high discount the rate equals a lower money supply and a higher interest rate. These all control the health of the economy. Interest rates are the prices that are charged or paid for the use of a financial asset (Colander, 2010). Financial assets are key variables in the financial sector and they can consist of either money or credit cards. However, money does not collect interest unless it is from the loanable funds market. In order for money to be considered in the loanable funds market it must be able to return into the loanable funds market for instance, an individual deposits $100 into the bank, the bank then loans $90 which is backed by the Federal Reserve out to anotherSince the discount rate controls the amount of money in the reserve it also affects interest rates on loans in the loanable funds market. A lower discount rate means more money supply which also means a lower interest rate. A high discount the rate equals a lower money supply and a higher interest rate. These all control the health of the economy. Interest rates are the prices that are charged or paid for the use of a financial asset (Colander, 2010). Financial assets are key variables in the financial sector and they can consist of either money or credit cards. However, money does not...
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...the last months of 2010 due to the increase in agricultural goods exports. The rise in imports was due to the increases in the value of the petroleum products. In the imports front, the Fed observes that the imports of automotive products, services, and consumer goods declined significantly. The Fed expects that the trade deficit will improve over the coming months. In the financial markets front, the Fed observes that short-term funding markets sustained their stability. As for then capital markets, broad U.S. stock price indexes increased. In fact, bank stock prices increased significantly. The corporations started issuing bonds. However, the Fed observes that debt financing of nonfinancial corporations poses no problems. The fixed-rate residential mortgages decreased. Banks reduced their holding of securities significantly, indicating the credit availability. Explain the Federal Reserve’s current view about inflation. According to the Federal...
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...FI 363 Financial Institutions and Market Core Assessment Discuss the money supply response to changes in key variables including the reserve ratio, the non-borrowed monetary base, the discount rate, the currency ratio, the deposit outflows and market interest rates. In financial markets, the money supply can and does respond to different factors and events that can change how the money supply is handled, addressed and issued. The reserve ratio, or the cash reserve ratio, is a regulation that sets the minimum reserves each bank must hold against deposits and notes. The more deposits the bank has, the more of a ratio it might need to hold against its deposits. The non-borrowed monetary base which can deal with the federal reserve holdings of both currency in circulation and reserves as well as the treasury’s holdings can affect the money supply as this is the where the money comes from and depending on the policies the federal reserve wants to maintain, can adjust the monetary base and make changes to affect the market supply of money. With that change, the Federal Reserve can affect monetary policy and then turn around and make loans to banks. The loans made to the banks come with a small bit of interest called the discount rate, the amount the Federal Reserve charges the banks for use of the issued money. Depending on the rate, banks can set their interest rates, which would affect how many people would qualify for lending. The currency reserve ratio is how international...
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...other banks II. the Fed's discount window II. ATM machines | | A. | I only | B. | II only | C. | III only | D. | I and II only | | Correct | Points Earned: | 1/1 | Your Response: | D | 2. | For a given money multiplier, a decrease in the banking system's reserves will cause the money supply to: | | A. | increase. | B. | decrease. | C. | remain constant. | D. | become difficult to predict. | | Incorrect | Points Earned: | 0/1 | Your Response: | A | 3. | When the Fed wants to increase interest rates, it: | | A. | instructs banks across the nation that they must raise their rates. | B. | sells bonds in the open market. | C. | buys bonds in the open market. | D. | adjusts the fractional reserve ratio. | | Correct | Points Earned: | 1/1 | Your Response: | B | 4. | Which of the following are the least liquid assets? | | A. | currencies | B. | checkable deposits | C. | small-time deposits | D. | savings deposits | | Incorrect | Points Earned: | 0/1 | Your Response: | B | 5. | If the Fed buys bonds in the open market: I. investment spending will increase. II. short-term interest rates will increase. III. inflation will increase. | | A. | I and II only | B. | II and III only | C. | I and III only | D. | I, II, and III | | Incorrect | Points Earned: | 0/1 | Your Response: | B | 6. | A bank will become illiquid if: | | A. | it has short-term liabilities that exceed...
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...Case 19 | Morris de Minas | By Ian H. Giddy | Vijak Pongtippun Viwan Wongviriyawong Wenyu | Introduction In August 1984, Morris Mini Mainframe Computer Company in New Jersey was looking for the most desirable financing alternative for Morris de Minas Ltda, its Brazilian affiliate, in the working capital needs of 82,650 million cruzeiros or US $39,320,000; at the exchange rate of 2,102 cruzeiros per US dollar. David Albuquerque, the vice-president of finance for the Latin American Division, was in charge of exploring possible financing arrangements and preparing a financing alternative plan. Albuquerque believed that Brazilian expected inflation rate and tax legislation, and the future exchange rate would play major roles in his analysis although it was not easy to predict. However, as a company’s consultant, we would help Mr. Albuquerque make the most effective decision that associated with the least risk possible. Company Background Morris was a manufacturer of super-mini computers located in Hackettstown, New Jersey. As it had gone globally a long time ago, by 1983, the revenue the company earned mostly from outside the United States In 1971, Morris (USA) entered the Brazilian market by assembling and distributing computers in Belo Horizonte, in the state of Minas Gerais. After its products became known for the high quality in the late 1970s, Morris expanded its market to Brazil to manufacture and distribute a line of super-minis, including a full line...
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...Aggregate Demand and Supply Models ECO/372 July 31, 2013 Aggregate Demand and Supply Models Aggregate supply and demand are crucial theories in macroeconomics as they assist economists in deciphering events in the past to help forecast the future. The aggregate supply curve model shows the correlation between the total price level of a country, and the quantity of goods and services manufactured by the suppliers of that country. The aggregate demand curve model shows the quantity of goods and services made locally that consumers, businesses, the government and foreigners are willing to buy during a specific time period. Part I – Analysis and Recommendations: Describe the current state of the following economic factors and analyze how each affects aggregate supply and demand. Develop a set of recommendations for the president regarding government spending and taxes based on the economic factors' current state. Unemployment Unemployment peaked in late 2009 through early 2010 and has come down roughly 2% since then (Bureau Of Labor Statistics, 2013). The unemployment rate for those who are 25yrs and older with at least a bachelor degree lingered at around a high 2% in the early to mid 2000's dropping even to 1.8% in August 2006. After, this the percentage slowly started to to increase and quickly grew around 2008. Just over three years after hitting 1.8%, unemployment for 25yrs and older with at least a bachelor degree grew to 5.1% in November 2009. There...
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...well as regular interest rates. While this sounds easy in theory, there are many steps leading to these regulations being both defined and implemented. What is money? How does it affect not only trade, but other aspects of the nation and its citizens' financial health? In order to begin, one must first understand just what money is, and what purpose it serves. Money, by definition, is “any circulating medium of exchange, including coins, paper money, and demand deposits.” (www.dictionary.com). Before money as an actual, tangible form of currency, people engaged in bartering, which is the exchange of one good or service for another. For example, a farmer may have chickens, and be in need of medical care. The farmer could trade medical care for a chicken that would lay eggs and provide abstinence for the physician. Eventually, coin and paper currency were developed, an individuals were able to sell products and services for currency. Currency became more valuable, as it was not limited its its use, nor did it expire or spoil. The central bank manages monetary policy in several ways. First, the Federal Reserve controls the money supply which effects both interest rates and the rate of inflation. This is accomplished by reducing the available money supply when inflation is high, and increasing the money supply when rates either skyrocket, or there is extremely limited growth in the economy. The Federal Reserve has two tools. One is that it can alter interest rates on the money the...
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...money Interest Rate Money Supply Money Demand (ii) Nominal Interest Rate Money Supply Nominal ------------ Interest Rate ------------------------------ (b) When the Federal Reserve sells bonds, what will happen to the price of bonds in the open market? Explain. Using a correctly labeled graph of the money market show how the open -market purchase of these bonds will affect the money supply and money demand. When the Federal Reserve sells bonds the price of money (interest rate) is decreased. When the Federal Reserve wants to increase money supply they purchase bonds. Fed Sells bonds to banks interest rates decreases...
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...FINM7407: Financial Institutions and Markets Seminar 02 Monetary Policy and Interest Rates Learning Objective: 2 Necmi K Avkiran, PhD Associate Professor in Banking and Finance UQ Business School n.avkiran@business.uq.edu.au http://www.users.on.net/~necmi/financesite/profile.htm Overview of the seminar Monetary policy RBA market operations Balance sheet of the RBA Determination of interest rates and factors that affect rates The yield curve Transmission mechanism Inflation and the Fisher Effect LIBOR and a bank’s funding curve BBSW Banks’ exposure to interest rate risk Case study: Crisis in Cyprus FINM7407 Seminar 02 2 Monetary Policy Monetary policy is an important tool used by governments to influence economic activity. Since 1984, it has taken a particularly simple form— the Reserve Bank of Australia (RBA) sets the overnight rate in the interbank market on unsecured loans, a.k.a. the ‘cash rate’. Currently, the cash rate on 15 July was 2.50%, with an inflation rate of 3% (see RBA’s web page to find more up-todate figures!). FINM7407 Seminar 02 3 Monetary Policy – continued Overview of Reserve Bank Objectives (i.e. ultimate targets) An ‘ultimate target’ of monetary policy is a variable the authorities seek to influence because of its welfare impact. Lower inflation has been the principal ultimate target for some time. Inflation target Stability of the Australian currency Maintenance of full employment...
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...Question In 1992 interest rates in Zimbabwe rose to an all time high. To what extent and in what ways are company financial policies and investment plans likely to be affected by the high interest rates Answer According to Thomas E Stitzel interest rates are the prices of credit,the cost of money,the earning rate on financial assets.It can also be defined as a fee paid on borrowed capital. Generally speaking, a higher real interest rate reduces the broad money supply. The "real interest rate" is the nominal interest rate minus the inflation rate. Zimbabwe continues to have negative real interest rates. These rates discourage investment and production but aid undesirable levels of speculation and in turn aid and abet inflation.For example in 1992 because of high interest rates companies like the GMB could not be able to supply maize in such a way that we had donors from USA donating yellow maize(Kenya). Gearing is fundamental analysis ratio of a company's level of long-term debt compared to its equity capital. Gearing is expressed is percentage form. If you have taken out a loan to fund your investments, such as a margin loan to invest in managed funds or a mortgage to buy direct property, increases in interest rates will increase your loan repayments Interest rates have an effect on consumer and business confidence. A rise in interest rates reduces the net return to investment thereby discouraging investment; it makes firms and consumers less willing to take out risky...
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...FED: Tools That Change the Money Supply Maggie Ensor Principles of Macroeconomics: ECO 203 Melvin Landry December 10, 2012 In this writing, I intend to inform you of the three tools used by the FED, to manipulate the direction of the economy. Further, I will explain how the FED can use these tools to influence, and better yet, get the economy out of a recession. First, to explain this properly, I need to define to you, Monetary Policy. Monetary policy refers to what the FED does to influence the amount of money and credit in the U.S. economy. What occurs with money and credit affects interest rates, and affects how the U.S economy performs. [2] www.federalreserveducation.org The goals of monetary policy are to promote maximum employment and stable prices; in doing so, supporting conditions for long-term economic growth and long-term maximum employment. [2] Alright, now that you understand monetary policy, I can explain to you, the three tools of monetary policy that the FED uses to manipulate the money supply in the U.S. economy. The first tool we will discuss is, “open-market operations.” Open-market operations are made up of the buying and selling of government securities from large banks and security dealers, thereby increasing the money supply in the hands of the public. [3] http://www.investopedia.com In an open-market, the FED doesn’t determine, by itself, which securities it will do business with. The choice comes from the open-market in which various...
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...established, they include stable prices, maximum employment and reasonable long term interest rates (Hetzel, 2008). Factors that would influence the Federal Reserve in adjusting the discount rate Factors that would influence the Federal Reserve in adjusting the discount rate include: Money supply: When money supply in the economy increases, the Federal Reserve increases the discount rate to encourage more savings Rate of borrowing: When the rate of borrowing is high the Federal Reserve increases the discount rate to discourage borrowing. Available reserves: When the available reserves decrease, the Federal Reserve decreases the discount rate to encourage more savings. Interest rates: This is where a decrease in interest rate would culminate into a decrease in the discount rate (Brezina, 2012). Does the discount rate affect the decisions of banks in setting their specific interest rates? The discount rate charged on the commercial banks by Fed for reserve lending is unavoidably less than the Federal funds rate. Therefore, the interest rate charged by commercial banks to other banks is usually higher to ensure profitability of banks. This is usually facilitated by the fact that commercial banks usually borrow from each other When Federal Reserve increases the interest rate charged on other banks, the commercial banks increase their prime rate, which affects the rates charged on mortgages,...
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...Fall 2012 [pic] ECO 212 – Macroeconomics Yellow Pages ANSWERS Unit 3 Mark Healy William Rainey Harper College E-Mail: mhealy@harpercollege.edu Office: J-262 Phone: 847-925-6352 Consumption and Saving Functions Y C S APC MPC APS MPS _____________________________________________________________________________________ 0 40 - 40 -- -- -- -- _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 100 120 - 20 1.2 .8 -0.2 .2 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 200 200 0 1 .8 0 .2 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 300. 280 20 .93 .8 .07 .2 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 400. 360 40 .90 .8 .10 .2 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 500. 440 60 .88 .8 .12 .2 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 600. 520 80 .87 .8 .13 .2 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ...
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...The Federal Reserve acquires its unique powers through its ability to issue money. Open your wallet or your purse and take a look at some bills. At the top, you will see the words “Federal Reserve Note.” In the past, many banks issued their own bank notes, which were used as money. But today the money we use in the United States is provided by just one bank, the Federal Reserve. Thus, the Federal Reserve has the power to create money—an awesome power that forms the centerpiece of this chapter. The Fed doesn’t have to literally print money. It can, as we shall see in more depth later in this chapter, also create money “by computer” by adding reserves to bank accounts held at the Fed. This new money can be given away or lent out in a way that increases aggregate demand. If the Federal Reserve is a bank, who are its customers? The Fed is both the government’s bank and the banker’s bank. As the government’s bank, the Fed maintains the bank account of the U.S. Treasury. When you write a check to the IRS to pay your taxes, the money ends up in the Treasury’s account at the Fed. In addition to receiving money, the U.S. Treasury also borrows a lot of money and the Fed manages this borrowing—that is, the Fed manages the issuing, transferring, and redeeming of U.S. Treasury bonds, bills, and notes. Since the U.S. Treasury is by far the world’s largest bank customer—it has more income and it also borrows more than any other bank customer—the Federal Reserve is a large and powerful bank...
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