If house Prices fall it will cause significant problems for the UK economy. There will be a fall in consumer wealth, and declining house prices can lead to negative equity. (house prices are less than what people bought them for). Therefore, some people will have their home repossessed and will also owe money on their old mortgages. The effects of a fall in consumer wealth will be to reduce confidence and consumer spending; equity withdrawal will slow down sharply – this has been a significant contributor to increasing AD in UK).
More things can affect how the ECB reacts when I comes to inflation and mostly targets a broader price index that includes things that doesn’t bother the FEDs as much, such as the Libya-related oil spike in 2011. (Bagus 2011) When the 2008 financial crisis was at its worst, the FED began an emergency lending program to ensure money continue to flow through the economy. $3.3 trillion was loaned to U.S. banks, European Banks, General Electric, McDonald’s and anyone and everyone who needed help. They also boosted the economy by buying more than $2 trillion of mortgage-backed securities and other bonds. (Hanna 2011) The FED generally acts as a lender at the last resort to help give the economy a need boost.
It achieves this through a process known as the transmission mechanism, which occurs in a number of distinct stages: - Purchasing and sale of government bonds in the STMM to influence the cash rate - Changes in the cash rate influence other interest rates, particularly short term securities, such as bank bills. In this way, changes in monetary policy are usually translated into the rates that banks charge for lending. - These lending rates then influence the decisions of businesses and household to borrow and spend, as seen in Figure 1, providing a key channel for transmitting monetary policy to the real economy. 3. Explain the possible impacts of loose monetary policy on the value of the exchange rate and on economic growth in Australia The effect of an expansionary monetary policy is to lower the exchange rate, weaken the financial
In order to attain these goals, governments use policies to influence the economy. These policies are the fiscal and monetary policies that are incorporated into the business cycle. Market economies have regular fluctuations in the level of economic activity which we call the business cycle. The business cycle as has four phases, as demonstrated in figure 1 below. The first phase is expansion when the economy is growing along its long term trends in employment, output, and income.
According to Brue (2010), monetary policy is defined as a central bank’s changing of the money supply to influence interest rates and assist the economy in achieving price stability, full employment, and economic growth. The automotive market is directly affected by the economy of the United States which is also directly controlled by monetary policy. In the automotive industry, there are two target groups of people that are marketed towards. These two groups are the “Baby Boomers” and “Generation Y.” Akers (2001) reported that the “Baby Boomers” own more than 70% of the financial assets in the United States, they control 70% of the households in the United States, and the “Baby Boomers” purchase 61% of all new cars and 48% of all luxury cars. “Generation Y” is now entering the high spending years of their early adulthood.
Banks have a reserve requirement, which is set by the fed. A reserve requirement is the minimum percentage of a bank’s total reserves that they are required to keep, for security reasons. (Schiller) The fed can change the reserve requirement to allow a bank to loan more/less money, which is used to control the economy. Many critics use this to determine that annual deficit spending has a negative impact on the economic stability of our country. The fed has to set a lower reserve requirement, which allows banks to loan out more money, which generates more interest, which could lead to periods of inflation and could have worse consequences if the government does not react quickly enough.
For consumers, interest rates represent the available funds they are willing to borrow to satisfy today’s needs. For businesses they represent the cost of borrowing money to invest in the growth of a company. Interest rates affect the economy. As the Fed raises or lowers short-term interest rates, banks may raise or lower the interest rates they charge borrowers, including the prime rate (Northrop Grumman, 2009). Changes in the prime rate may affect the whole economy.
Gross domestic product, adjusted for inflation, also known as "real GDP", can tell economists whether an economy is growing or contracting from year to year or from quarter to quarter, a key determinant in deciphering whether the economy is expanding or in a recession. Internationally, gross domestic product adjusted for some benchmark, usually the US dollar, is a good indication of whether a nation's economic output is increasing or shrinking relative to other nations of the world. To exactly know if GDP is a good enough indicator of understanding an economy, it should be compared to an equivalent form of indicator. This is where we come across GNP which is quite similar to GDP. So let us understand what GNP is in order to compare these two entities.
THE ROLE OF FEDERAL RESERVE BANK IN THE US PAYMENT SYSTEM Currency and Coin • • • • Responsible for distributing currency and coin to depository institutions, and ensuring that enough currency and coin are in circulation to meet public demand. New currency and coin are shipped to Reserve Banks and branches across the country. When people need additional cash, a depository institution may order more currency and coin from its Reserve Bank or branch. Institutions pay for these orders by drawing down their Federal Reserve account balances. Checks • • Reserve Banks also provide check collection services to depository institutions.
Monetary and Fiscal policy What is the difference between fiscal and monetary policy? Monetary policy is typically implemented by the central bank, and refers to actions which influence the availability and cost of money and credit, as a means of helping to promote economic growth and price stability. Tools of monetary policy include open market operations, the discount rate and reserve requirements. Fiscal policy decisions are set by the national government, and include decisions about the amount of money it spends and collects in taxes to achieve full employment and a non-inflationary economy. However, both monetary and fiscal policy may be used to influence the performance of the economy in the short run.