...Business Financing and the Capital Structure of the Federal Reserve Strayer University Principles of Finance (FIN100) Abstract This paper will describe one way the US financial markets impact the economy. How the US financial markets impact businesses and one way that they impact individuals. Providing a brief explanation of the primary roles of the US Federal Reserve, the Federal Reserve Chairman, and the Federal Reserve Board. Explaining the ways that interest rates influence the US and global financial environment. We will also give an example of influence for both the US financial environment and one example of the global environment. The Federal Reserve System or Federal Reserve is the central banking system of the United States (US). Congress established this system in 1913 to provide America with an organized, secure, flexible monetary and financial system. This essentially creates stability by balancing systematic risks; according to the Federal Reserve website. There are a total of 12 Federal Reserve Banks located in major cities throughout the US. The banks generate their income based on services provided to other banks, interest accrued on government security bonds and interest accrued on loans and deposits. Each of the aforementioned generates income which is circulated back into the US Treasury. As mentioned in Investopedia, “The Fed’s mandate is to promote sustainable growth, high levels of employment, stability prices to help preserve the purchasing power...
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...The Federal Reserve Jermaine C. Taylor ECO320 Money & Banking March 2, 2014 Prof. Diana Bonina, Ph.D. Strayer University The Federal Reserve established on December 23, 1913 when President Woodrow Wilson signed the Federal Reserve Act into law. Although started in 1913, actual operations of the Reserve began in 1914. In order to provide the country with a safer financial system, Congress created The Federal Reserve System as the central bank of the United States. Today, the Federal Reserve’s responsibility falls into four general areas: conducting the nation’s monetary policy; supervising, regulating and other soundness of the country’s financial system; maintaining the stability of the financial system and providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions. The Federal Reserve can use the following tools to influence the money supply: Open Market Operations, The Required-Reserve Ratio and Discount Rate. The Federal Reserve uses Open Market Operations as its primary tool to influence the supply of bank reserves. This tool consists of Federal Reserve purchases and sales of financial instruments, usually securities issued by the U.S. Treasury, Federal agencies and government-sponsored enterprises. Using Open Market Operations, Federal Reserve can affect the money supply by buying or selling the U.S. government securities. When the Federal Reserve purchases a government security from the public...
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...Although since the Federal Open Market Committee meeting in March 2014 economic indicators are indicating growth in economic activity. The growth was stunted in the early part of 2014 mainly due to adverse weather conditions during the winter months. This trend is reflected in the initial estimates of real GDP growth for the 1st quarter of 2014 which slightly increased by an annual rate of .1 percent compared to the 4th quarter of 2013. The growth rate shown in 2014 is compared to a 2.4 percent growth rate realized in 4th quarter of 2013. The deceleration in real GDP growth during the first quarter of 2014 is a direct result of negative contribution from exports, private inventory investments, and state and local government spending. This trend in GDP is a direct result of the federal fiscal policy established for 2014. Long term interest rates during the years after the financial crisis were intentionally maintained at very low levels. These low levels of long term interest rates enabled the economy to bounce back and experience moderate growth. During 2013, we saw interest rates begin to increase with further increases expected in the coming years. The current levels of the money supply in the United States as of March 2014 are at all-time highs. The M2 in the United States has gradually been increasing since January 2013. US stock market experienced a solid year in 2013, led by continued monetary support as a result of polices put in place by the Federal Reserve, in addition to...
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...Should the USA convert to a zero personal income tax? Abstract: This paper will discuss 2 countries that have implemented zero federal income tax and what would happen if the US chose to adopt a similar tax base. Every year most people in the United States of America gear up to file their yearly personal income taxes. The government relies on this money to operate. About forty five percent of the government income of the United States comes from personal income tax. A lot of Americans wish that they did not have to pay personal income taxes and that the US would adopt a zero income tax policy. There are many countries that currently have a zero tax model and it works. This paper will discuss the systems of Qatar and the Cayman Islands and determine if the US could benefit from similar models. In Qatar the government relies on its income from the natural gas reserves. It is one of the richest countries in the world. Qatar’s gas reserves are the third largest in the world. It requires businesses that are in the oil and gas industries to pay a thirty five percent tax rate. Residents of Qatar pay five percent of their income to social security and their employers pay 10 percent. Because the U.S. does not have the natural gas reserves like Qatar, it cannot rely on such reserves to provide income for the government. The Cayman Islands are another country with a zero personal income tax. They also do not require residents to pay into social security. Because...
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...for reserves and federal funds rate Demand and Supply (Partial) Equilibrium Comparative Static Analysis Introduction to monetary policy tools Conventional tools Unconventional tools Hyung Sun Choi, Kyung Hee University Market For Reserves & Federal Funds Rate 3 Demand and Supply in the Market for Reserves What happens to the quantity of reserves demanded by banks, holding everything else constant, as the federal funds rate changes? Fed Funds Rate: the interest rate on overnight loans of reserves from one bank to another. The primary instrument of monetary policy Hyung Sun Choi, Kyung Hee University Demand for Reserves, 4 d R Rd = required reserves + excess reserves Since the fall of 2008 the Fed has paid interest on reserves at a level set at a fixed amount below the federal funds rate target. Excess reserves are insurance against deposit outflows The cost of holding these is the interest rate that could have been earned minus the interest rate on reserves, ior Hyung Sun Choi, Kyung Hee University When the federal funds rate is above ior as the federal funds rate decreases, the opportunity cost of holding excess reserves falls and the quantity of reserves demanded rises Downward sloping demand curve that becomes flat (infinitely elastic) at ior 5 Hyung Sun Choi, Kyung Hee University Supply in the Market for Reserves 6 Rs = discount loan + non-borrowed reserves ...
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...As a financial manager three major decisions are to be made which are investment, financing, and dividend decisions (Pujari, S 2015). When decisions are made in investments financial managers carefully select fixed assets also known as capital budgeting decision or current assets in which funds will be invested by the company (Pujari, S 2015). There are factors that affect the investment and capital budgeting decisions such as cash flow of the project, return on investments, risks involved, and investment criteria. For the cash flow of the project the company invests a huge amount of funds in an investment proposal it is expected to sustain a regular amount of cash flow to meet the daily requirements (Pujari, S 2015). The amount of cash flow generated must be assessed before the company invests in a proposal. The returned investment is the most important criteria in deciding the rate of return for the investment proposal. Every investment proposal has some type of risk involved, financial managers need to calculate the risks involved and consider the proposal that has the least amount of risks (Pujari, S 2015). In investment criteria financial managers need to compare all the alternatives to help the company to decide the best proposal to invest in. Investment decisions are important they are long term decisions and are irreversible, it involves in huge amount of funds, it affects the future earning capacity of the company (Pujari, S 2015). The second important decision that...
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...Global Managerial Economics By: Starlette Freitas ECON310-1302A-02 May 06, 2013 International Economics and Concepts Governments measure the three most commonly-used concepts based on aggregate markets: the unemployment rate, the rate of inflation, and Gross Domestic Product. These rates and measurements are used to determine the health of an economy. Depending on its rates, it will show the strengths and weaknesses in its economic status of growth or downfall. When the unemployment rate is high, that shows symptoms of malfunctioning in the economic system. This rate is incurred through a random amount of surveys in households and those answers of those surveys each month is how the unemployment rate is determined. This rate is found by dividing the total number unemployed by the labor force. If this rate is so, more than likely there is a lot of financial distress as well, which affects the abilities to make loans, pay debts, and the overall cycle of money that flows within an economy; the ability to purchase goods and services, or even invest and meet aggregate supply and demand. (Editorial Board) If the unemployment rate is high, then businesses are not doing well, and if businesses are not doing well, most likely investments are not doing too great either. The chart below represents what the statistical rates would look like as to what happens when the unemployment rate goes up, how inflation is affected as well as GDP. As it clearly demonstrates, the higher...
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...chapters describing the structure of the Federal Reserve System and the money supply process, we mentioned three policy tools that the Fed can use to manipulate the money supply and interest rates: open market operations, which affect the quantity of reserves and the monetary base; changes in discount lending, which affect the monetary base; and changes in reserve requirements, which affect the money multiplier. Because the Fed’s use of these policy tools has such an important impact on interest rates and economic activity, it is important to understand how the Fed wields them in practice and how relatively useful each tool is. In recent years, the Federal Reserve has increased its focus on the federal funds rate (the interest rate on overnight loans of reserves from one bank to another) as the primary indicator of the stance of monetary policy. Since February 1994, the Fed announces a federal funds rate target at each FOMC meeting, an announcement that is watched closely by market participants because it affects interest rates throughout the economy. Thus, to fully understand how the Fed’s tools are used in the conduct of monetary policy, we must understand not only their effect on the money supply, but their direct effects on the federal funds rate as well. The chapter thus begins with a supply-and-demand analysis of the market for reserves to explain how the Fed’s settings for the three tools of monetary policy determine the federal funds rate. We then go on to look in more...
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...Bitcoin Cryptocurrency Recently, notable interest in payment systems based on virtual currency such as Bitcoin has become widespread. According to Burt, Gilbert, and Blye (n.p), Bitcoin advocates were dealt a major blow in 2014 when the most active Bitcoin world exchange, Mt. Gox, was declared bankrupt, incurring approximately $473 million in losses. Following the Mt. Gox collapse, Bitcoin value fell to around $500 from a high of $1000. Despite this, interest in Bitcoins has remained surprisingly resilient (Trautman 23). This paper will explore the efforts aimed at developing a novel and improved digital exchange medium, its advantages, and disadvantages. The paper will also explore the regulatory environment around the currency, to understand the digital currency better. Characteristics of Bitcoin Bitcoins were created in 2009 as a cryptocurrency, with the intention of making an electronic peer-to-peer system of payment with cryptographic proof (McMillan & Metz n.p). Peer-to-peer systems mean that no central authority regulates new money or tracks new transactions. Numerous features make this system different from payment systems such as M-Pesa or PayPal. First, this system supposedly eliminates the need for any financial intermediary such as banks or credit companies to handle payments (McMillan & Metz n.p). Next, the basic premise is that this system is irreversible and less expensive as compared as compared to other conventional banks as well as credit card...
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...Arlene Ochoa Professor Jim Davis Econ 1 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...
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...The Global Capital Market Learning objectives • Articulate the benefits of the global capital market. • Understand why the global capital market has grown so rapidly over the last quarter century. • Be familiar with the risks associated with the globalization of capital markets. • Appreciate the risks and benefits associated with the Eurocurrency market, the global bond market, and the global equity markets. • Understand how foreign exchange risk impacts upon the cost of capital. This chapter discusses the form and function of the global capital market. The market is attractive because its size lowers the cost of capital for borrowers, and allows investors to diversify their portfolios, thereby reducing their risk. Advances in information technology, and the deregulation of financial services and the relaxation of regulations on cross-border capital flows have contributed to the growth of the global capital market. The chapter then goes on to explore the Eurocurrency market, the global bond market, and the international equities market. The opening case describes how ICBC, China’s largest bank, raised $21 billion in the international equities market. The closing case examines how China Mobile raised capital in international markets through a stock offering and a bond issue. OUTLINE OF CHAPTER 11: THE GLOBAL CAPITAL MARKET Opening Case: Industrial and Commercial Bank of China Introduction ...
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...The Federal Reserve Bank As the United States moves towards a globally interdependent marketplace, the global monetary stakes have become much higher. The United States Congress established the Federal Reserve in the early 1900’s. A country’s debt can now become the world’s debt, and the role of the U.S. federal banking system is now considerably more under pressure and scrutiny than ever before. As we have been seeing with the current liquidity crisis in the U.S., and how it has affected U.K. and Asian markets, strong, comprehensive policy-making is now crucial to sustaining long-term economic viability. The American economy is a complex balance of services, financial, manufacturing, agricultural, and banking industries. For this reason, the U.S. is a global economy, relying upon foreign investments and trade to create and retain wealth. Over the years, America has evolved from farming-based, to industrial, to a services-based economy. As a result, the banking system from its inception has weathered the many growing pains associated with a new government and currency, instituting regulations and a centralized bank to examine the economy, and implementing policies intended to offset factors negatively affecting the general financial health of the country. Despite the growing need for quick, precise actions by the Federal Reserve System, the decision-making regarding the economy is often met with controversy. The recent bail out plan, passed by Congress...
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...advance socioeconomic policies and objectives. As a result, the Federal government has a vested interest in ensuring the growth and health of small businesses by creating opportunities for these enterprises to get a slice of federal dollars through government contracts. Socioeconomic Programs originate from the Small Business Act created in 1953, which declares “it is the policy of the United States that small business concerns shall have the maximum practicable opportunity to participate in the performance of contracts let by any federal agency, including contracts and subcontracts for subsystems, assemblies, components, and related services for major systems” (SBA, 2011). In 1997, Congress established a 23% goal for the awarding of federal contracts to small businesses. These programs, which include incentive, set-aside, and preference programs, give small businesses and small businesses owned by special minority and disadvantaged groups’ advantages in bidding on federal contracts. The following five types of socioeconomic programs require agencies to limit competition on certain contracts to qualified small businesses so that small firms do not have to compete with large ones for the same contracts. Small Business Set-Asides are enterprises engaged in a for-profit business which is independently owned and operated and not dominant in its field of operation. The Federal Government is required to reserve a fair proportion of its total purchases and contracts for property...
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...Value Case Brief I Resolutional Analysis A Definitions B Principles in Contention: The Federal Government Should Change the Dodd-Frank Act Dodd-Frank makes certain amendments to the "Protecting Tenants at Foreclosure Act of 2009" (the “Tenants Protection Act”), which affects post-foreclosure eviction procedures. The amendments to the Tenants Protection Act found in Dodd-Frank were effective on July 21, 2010. The primary advantage is that the regulation ensures the safety of us residents’ funds. This is the intention of the regulation. It is also expected to enrich the US State Treasury since the funds invested won’t be taken out of the USA borders. C Value: Prevent Stock Issues 1 credit cards, loans, mortgages 2 new agencies 3 hedge funds II Contention 1: Credit Cards, loans, mortgages The Consumer Financial Protection Agency consolidated protection from many different agencies. It oversees credit reporting agencies, credit and debit cards, payday and consumer loans (but not auto loans from dealers). The CFPA regulated credit fees, including credit, debit, mortgage underwriting and bank fees. It protects homeowners in real estate transactions by requiring they understand risky mortgage loans. It also requires banks to verify borrower's income, credit history and job status. The CFPA is under the U.S Treasury. III Contention 2: New Agencies The Act changes the existing regulatory structure, such as creating a host...
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...Saravanan Panneervel PCA 540‐01 (TTH) Argumentative Essay Draft 1 (12th Sep. 2012) An Ideal Situation: ’ Free Enterprise System Along With Regulated Banking’ The U.S. economy is a free enterprise system which means each individual is entitled to earn profits, own private property, compete in a market place for business and make economic decisions for themselves. In such a system some people argue that regulation of economy and economy driving entities, such as banks, may affect the U.S. free enterprise system. Henry Davis Thoreau, an influential figure in American thought and literature and a proponent of laissez faire, said: “That government is best which governs least; and I should like to see it acted up to more rapidly and systematically. Carried out, it finally amounts to this, which also I believe—‘That government is best which governs not at all’; and when men are prepared for it, that will be the kind of government.” If we speak of banks in the context of regulation or deregulation, I feel that regulation of an economic entity like a bank would not only protect depositors but also secure national monetary stability, preserve an efficient and competitive financial system and protect consumer interests. Businesses and individuals hold a significant portion of their funds in banks and ...
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