... 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. Fed Sells bonds to banks interest rates decreases. Fed...
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...Keynote Address, Conference on Price Stability Federal Reserve Bank of Chicago Thursday, November 3, 2005 From Inflation to Disinflation and Low Inflation By Allan H. Meltzer Volume 2 of A History of the Federal Reserve covers mainly the years of inflation and disinflation, followed by a return to what is now regarded as relatively low inflation. It treats four questions: Why did inflation start? Why did it continue for 15 or more years, from 1965 to about 1982? Why did it end? Why did it not return? In this paper, I give an overview of the material that I consider in much greater detail in my book. As we look back to the 1950s and 1960s from the early 21st century, two of the many changes in the Federal Reserve System affecting inflation deserve comment. First, in the 1950s the goal was price stability, zero reported inflation, not inflation of about two percent. The 1959-60 disinflation brought reported cpi inflation, measured as a 12-month moving average, to less than 1 percent from March through August 1959. This measure again was below 1 percent through most of 1961, and it did not reach 2 percent until early 1966. Properly measured and adjusted for biases in the price index, the true price level probably declined modestly during this period. This period of deflation was also a period of sustained economic growth. It, and several periods of deflation discussed in volume 1 of A History of the Federal Reserve, show no evidence of the liquidity trap that...
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...just can take the domain of risk. There some limits are imposed to cover exposures to overall position concentrations, counterparties, and credits that relative to different types of risks, even that are eligible for those investments. As a whole organization and any one individual can be assumed their imposition restricts the risk, although the limits are expensive to administer and establish. The general case, each portfolio managers, lenders, and traders must have well-defined limit in commit capital. For example, Volcker Rule. What is Volcker Rule? In the wake of the financial crisis of 2008, Dodd-Frank is a key part to reform its rule and this Volcker Rule was named by former Fed Chairmen Paul Volcker. The Volcker Rule was sketch by the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, the Federal Reserve, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission. These regulation known as the Volcker Rule would prevent bank for their own gain from speculative trading in the market. For those banks engage in similarly speculative...
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...Response to the Finance Questions Name University Response to the Finance Questions Response to Question 1 Liquidity premium theory states that the yield obtained from the bonds that are long term are greater than the return that is expected from short-term bonds that roll over so as to compensate long-term bonds investors for bearing the risks of interest rate. Bonds that have different maturity can, therefore, have different yields regardless of the possibility of future short rates being equivalent to the present short rate. This results in a yield curve that bends upwards even if the short rates are expected to fall if liquidity premiums are sufficiently high. However if the curve slopes downwards and an assumption is made that the liquidity premiums is positive, then we can presume that future short rates would be lower than the present short rate (Lim & Ogaki, 2013). Liquidity premium theory agrees with expectations theory since it gives the same significance to the expected future spot rates though it puts more weight on the impacts of the risk preferences that exist in the market. The main concept of this theory is to compensate an investor for the additional risk of having his capital tied up for a more extended period. It, therefore, aims at enticing investors to engage in long-term investments. Due to the uncertainty associated with long-term rates which have less marketability and greater price variability, investors, therefore, need to be given higher...
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...international trade. However, when the president’s advisors went to office with the idea of cutting both taxes and spending, they found out that the first objective was easier to achieve than the second because of politics of the day. Cutting tax was popular and they did come down substantially. The top marginal rate reduced to 28 per cent from 70 per cent (Magazzino, 2010). Many loop holes were eliminated and the tax base broadened. However, cutting the spending was unpopular and the democratic congress restrained as a result of the cuts proposed by the president. One of the most influential parties in the implementation of Reaganomics is Volcker. His efforts ensured monetary restraint quite early in the president’s administration. He was one of the economic advisors of the president. He served as the chairman of Federal Reserve and played a big role in ending the high...
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...Memorandum The Volcker Rule Introduction The regulation of financial institutions has long been a controversial subject in the United States of America, going through cycles of increasing or decreasing rigorousness. Following the Stock Market Crash of 1929 and the Great Depression, the US Congress enacted several laws designed to regulate financial institutions. One of these laws, the Banking Act of 1933, included four provisions limiting the ability of deposit-taking institutions to trade for their own benefit. These provisions are colloquially referred to as the Glass-Steagall Act. GlassSteagall forbade commercial banks from dealing, underwriting and investing in most securities. By the late 1990s, the resolve to enforce Glass-Steagall faded, shown particularly by the Fed’s blessing of the Citicorp/Travelers Group merger. In 1999, President Clinton signed the Gramm-Leach-Bliley Act into law, effectively repealing the Glass-Steagall Act. Echoing the political landscape following the Great Depression, the aftermath of the Great Recession saw a resurgence in grassroots campaigns to reinstitute tougher regulations on banks and financial institutions. The bailouts given to many large banks fueled this public outrage, especially in the light of the million Americans losing their homes to foreclosure. A recently inaugurated Obama administration sought to prevent a reoccurrence of the financial crisis by tightening government regulation of financial institutions. This eventually manifested...
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...plan to stimulate the American economy in the wake of the 1980s recession led to sweeping deregulation in the financial services sector (Komai) (Inside). This deregulation and the failure to properly enforce regulatory powers by those in the Federal Reserve and Treasury Department led to increasingly risky behavior by banks (Inside) (Das) (Rajan). The repeal of The Glass-Steagall Act in the late 90s meant that the banks engaging in these risky operations were larger than ever before and were using depositors’ money in order to trade for the benefit of the firm rather than its clients (Roubini) (Rajan) (Sorkin) and it is that risky behavior that ultimately led to the near collapse of the world’s economy. Although banking leadership must be held responsible for the practices that many institutions in the financial services sector engaged in (Sorkin), the failure to adequately regulate the banking industry gave banks the opportunities to engage in the behavior that caused the crisis (Inside) (Rajan) (Taylor). In the years since the crisis, and as the global economy continues in its efforts to recover, many have called for strict reform of Wall Street regulations (Acharya). Legislative efforts have resulted in the Dodd-Frank Act and the Volcker Rule, which aim to ensure that the risky financial practices that caused the 2008 financial crisis will not be repeated (Acharya) (Johnson). While the recent financial crisis may have occurred in 2008, the seeds of the disaster were sown in...
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...reducing or eliminating decades-long social programs and significantly increasing defense spending, while at the same time lowering taxes and marginal tax rates, Reagan's approach to handling the economy marked a significant departure from that of many of his predecessor's Keynesian policies. 3 Before the tax cut, the economy was battling high inflation, high Interest rates, and high unemployment. These three issues dropped sharply after the tax cuts. The unemployment rate, which was at 9.7 percent in 1982, began a steady decline, reaching 7.0 percent by 1986 and 5.3 percent when President Reagan left office in January 1989. Inflation-adjusted revenue growth dramatically improved. Over the four years period before 1983, federal income tax revenue reduced at an average rate of 2.8 percent per year, and total government income tax revenue decreased at an annual rate of 2.6 percent. 4 In accordance with Reagan's less-government intervention views, many domestic government programs were cut or experienced periods of reduced funding during his presidency. Tax breaks and increased military spending resulted in an increase of the national budget deficit and led Reagan and Congress to approve two tax increases, aiming to preserve funding for Social Security, though not as high as the 1981 tax cuts. 5 The American economy went from a GDP growth of -0.3% in 1980 to 4.1% in 1988 (in constant 2005 dollars), averaging 7.91% annual growth in current dollars...
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...The Fisher Effect and the Quantity Theory of Money Eric Mahaney 4/7/13 EC-301-1 The Fisher effect and the Fisher equation were made famous by economist Irving Fisher. He created his equation by rearranging the equation for real interest rate, which is (r = i - π). Real interest rate equals the nominal interest rate plus inflation. This is a very basic equation. Fisher manipulated it to solve for i, in order to understand the effect that inflation has on nominal interest rate. The famous equation is i = r + π, nominal interest rate equals real interest rate plus inflation. This is basically saying that the nominal interest rate can be changed by a change in either the real interest rate or inflation. The Fisher effect is the one to one relationship between the inflation rate and the nominal interest rate. According to this model, as inflation increases, the nominal interest rate should also increase by the same proportion. The main concept behind the Fisher effect is that higher inflation causes higher nominal interest rate. (Mankiw, 91-92) By using the Fisher effect along with the quantity theory of money, the effect that money growth has on nominal interest rate can also be analyzed. The quantity theory of money is M*V=P*Y or the quantity of money multiplied by the velocity of money equals price multiplied by output. The velocity of money is assumed to remain constant in order to simplify the model. Therefore, PY is determined solely by the quantity of money...
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...The Federal Interest Rate and How it Effects Business Interest is the cost of borrowing money. You pay it in almost every facet of life and business, from taking out a home mortgage, to credit card use, to equipment loans and lines of credit. The rate that you pay or the percentage is not random and is directly correlated to the Federal Reserve Bank’s (The Fed) interest rate. The Fed’s interest rate has an endless effect on how the economy operates and how business is done throughout the world. This effect not only has a direct impact on the stock and bond markets but has an even greater effect on how business operations make decisions and progress in our society. Monetary policy in the United States has been and always will be one of the most important topics in politics that we have as a nation. The effect that inflation has upon society is the greatest threat to wealth management and stability that we face. This interest rate or more specifically, the monetary policy used by the Fed is what drives business and commerce. The effect of the Federal interest rate to not only create opportunity but have the ability to drive industry up or down depending on the amount of money banks have to lend to small businesses and individuals is profound. Every politician will at some point or another, state that “Small Business is what drives the American Economy!” This is not just rhetoric but proven by the amount of jobs and income generated from small business. According to the...
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...An Open Letter from Kenneth Rogoff, International Monetary Fund, to Joseph Stiglitz, Author of Globalization and Its Discontents 2 July 2002 At the outset, I would like to stress that it has been a pleasure working closely with my World Bank colleagues—particularly my counterpart, Chief Economist Nick Stern—during my first year at the IMF. We regularly cross 19th Street to exchange ideas on research, policy, and life. The relations between our two institutions are excellent—this is not at issue. Of course, to that effect, I think it is also important, before I begin, for me to quash rumors about the demolition of the former PEPCO building that stood right next to the IMF until a few days ago. No, it's absolutely not true that this was caused by a loose cannon planted within the World Bank. Dear Joe: Like you, I came to my position in Washington from the cloisters of a tenured position at a topranking American University. Like you, I came because I care. Unlike you, I am humbled by the World Bank and IMF staff I meet each day. I meet people who are deeply committed to bringing growth to the developing world and to alleviating poverty. I meet superb professionals who regularly work 80-hour weeks, who endure long separations from their families. Fund staff have been shot at in Bosnia, slaved for weeks without heat in the brutal Tajikistan winter, and have contracted deadly tropical diseases in Africa. These people are bright, energetic, and imaginative. Their dedication humbles...
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...FINANCIAL CRISIS OF OUR TIME WHAT HAS HAPPENED In September 2008, the Bankruptcy of Lehman Brothers and the collapse of AIG, following the demise of Bear Stern and the near collapse of Merrill Lynch triggered a financial crisis. The result was a global recession which cost the World tens of trillion of dollars, rendered 30million people unemployed and doubled the national debt of the U.S. But this crisis was not an accident. It was caused by an out of control calamitous financial industry. In the aftermath of the Great Depression, the US enjoyed a 40 year economic growth without a single financial crisis. The Financial industry was tightly regulated. Critical to these regulations was The Banking Act of 1933, known as the Glass-Steagall Act, which separated commercial banking activities from Investment banking activities, meaning Banks with consumer deposits were prevented from engaging in risky investment banking activities. Most regular banks were regular businesses and they were prohibited from speculating with depositors’ savings. Investment banks, which handled stocks and bonds trading, were small private partnerships. In the 1980’s, the financial industry exploded. The Government, with support from Economists and Financial lobbyists started a 30 year period of financial deregulation. In 1982, the Government deregulated the Savings and Loans companies allowing them to make risky investments with depositors’ money. By the end of the decade, hundreds of Savings and Loans...
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...The United States deficit contributes to its debt and the debt contributes to the deficit. We know the longest running uninterrupted surplus for the Unites States was from 1920 to 1930 but spent most of it combating the war. This will show how the U.S. deficits, debt, and surplus affect the following areas; the taxpayers, future social security and Medicare users, unemployed individuals, University of Phoenix students, The United States financial reputation on an international level, a domestic automobile manufacturer (exporter), and a Italian clothing company (importer). Taxpayers This will show how the debt and deficit affects taxpayers. Taxpayers get caught up in the government debt and are left to pay it off. Individual debt is different from government debt, and the reasons for this are: (1) the government lives forever and people don’t, so the government is ongoing. When people die, all debts must be paid to old Uncle Sam before relatives get the reminder. (2) The government can print money and people cannot, and as long as another country accepts our currency, we can always exchange money with those countries. (3) The government owes much of it debt to itself. It is sort of like owing oneself so one will never go broke. The internal debt which is the debt owed to other governmental agencies or to its own citizens, and when it pays on its internal debt it involves a redistribution of the citizens but it does not reduce the income of the citizens. For example...
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...Why did Carter fail to win re-election in 1980? Carter was one of the few presidents that did not manage to win a second term in office, which was down to a number of reasons, namely for his failures on foreign policy specifically in Iran, as well as his failings on the economy and with the energy crisis. Reagan also ran a very strong campaign and managed to appeal to voters far better than Carter, as they saw that he had a clear vision, something they did not see in the president. These factors all contributed to Reagan’s victory over Carter in 1980, even though the turnout was only 53% of the electorate. One main reason Carter did not manage to win the 1980 election was his weak handling of the Iran hostage crisis, which made him a victim of events that were out of his control. After Iranian militants stormed the American embassy in Tehran due to their protest against Carter allowing the exiled Shah to receive cancer treatment in the USA, they took 60 American hostages. The embassy was only supposed to be held for a few hours but the hostages were held until President Reagan was sworn into office. This made Carter look weak, especially after his failed rescue attempt which left more Americans dead and injured after some of the helicopters crashed. The hostage crisis dragged on throughout election year, and many felt that Carter had messed up everything. The energy crisis worsened Carter’s campaign. The United States had been economically self sufficient post world war...
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...Recession In economics, a recession is a business cycle contraction. It is a general slowdown in economic activity.[1][2] Macroeconomic indicators such as GDP (gross domestic product), investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation. Definition In a 1975 New York Times article, economic statistician Julius Shiskin suggested several rules of thumb for defining a recession, one of which was two down consecutive quarters of GDP.[3] In time, the other rules of thumb were forgotten. Some economists prefer a definition of a 1.5% rise in unemployment within 12 months.[4] In the United States, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is generally seen as the authority for dating US recessions. The NBER defines an economic recession as: "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment...
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