Introduction The Federal Reserve makes many decisions which can alter the course an economy takes. The Reserve has quite a bit of influence on how an economy recovers from both recessions and rising inflation due to extreme growth. A closer look will be made at the importance and function of money and how the central bank manages a nation’s monetary system. An explanation will be made to show what effects the Federal Reserve’s monetary policy has on the economy’s production and employment. Finally, a look inside the most recent Chairman’s Report will explain what direction the Reserve has decided to move in regards to monetary policy.
When the demand for U.S. dollars increases, the value of the dollar will increase or appreciate (Stone 2008, pp. 685). As a result, U.S. products become more expensive for foriegners causing a reduction in exports and increasing imports. This not only effects the U.S. economy, but also affects the economies in other countries. Monetary policies influence and are influenced by international developments, including exchange rates, and based on these market conditions the U.S. government can make strategic changes to these policies to maintain the country’s economic stability (full employment, stable growth and price stability).
(asic.gov.au) · As the financial markets became mainstream and matured, the access to capital markets and their scrutiny have both increased. Along with the added volatility, the lending markets have seen similar risks as equity markets. With the increased speed of both financial information and market changes, the rating agencies are more important as a first step, as they are to be scrutinized for their ratings and the trend in their rating changes. (investopedia.com) · CRAs and their ratings played a critical role in the recent market turmoil. Unlike securities trading on deeper, more transparent markets, credit ratings have had an inordinate impact on the valuation and liquidity of subprime RMBSs and RMBS backed
ECO 252 The Federal Government Budget Deficit and the American Economy How elected officials deal with the budget deficit will have a definite impact on our economy. There are many questions to be answered, and the possible outcomes are linked to the infinite number of possible answers. The following essay will explore some basic economic concepts including, opportunity cost, good economics versus good politics, the Laffer curve, capitalism versus socialism, and the “invisible hand”. Many Americans look at the budget deficit in the simplest of terms. More expensive government programs will require more taxes to fund them.
Many economists believe “that a rapid stock of the nation’s money causes inflation” (pg.169). The rate of inflation can affect borrowing power for a new business owner as, “the rate of inflation expected by the borrower and the lender will be influence by various interest rates” (pg. 169). When inflation is high, many lenders interest rate increase to compensate for the impact inflation has on their business and the decrease in purchasing power of money that has to be paid back in the future. Since, the FED set the interest rate in which the banks borrow from, Edgars’ ability to borrow enough money or establish a line of credit to start his business will be affected by inflation, interest rate and financial policies.
This will increase interest rates because the trade deficit will demand loans from the foreign countries. Problems 6-2: 2.25% 6-3 6-4: 1.5% 6-5 Integrated Case a. The four most fundamental factors are inflation, risk, production opportunities, and time preferences for consumption. b. The real risk free rate of interest is the rate that would exist on default free securities in the absence of inflation, and the nominal risk free rate is the risk free rate plus an inflation premium.
Factors like the strength of the economy, activities of international investors, and foreign trade all have something to do with the change in supply and demand. Given the size and mobility, the flow of capital is a determining factor of how the exchange rates will comply. Once the influences mentioned above affect the interest rates, the exchange rates among the market determined currencies are also influenced because currencies are extremely vulnerable to changes in interest rates and sovereign risk factors. The key drivers of an exchange rate stem from international capital and trade flows, the interest rate differentials net of expected inflation, trading activities in other currencies, monetary policy and central banks, and financial and political stabilities. If local prices in a country increase more than prices in another country for the same product; being is that foreign exchange forward markets are linked to interest markets; then the local currency may decline in value via its foreign counterpart, presuming there is no change with the structural relationship between the two.
China’s Merchandise World Trade, 1979-2006 ($ billions) Year 1979 1980 1985 1990 1995 2000 2005 2006 Exports 13.7 18.1 27.3 62.9 148.8 249.2 762.0 969.1 Imports 15.7 19.5 42.5 53.9 132.1 225.1 660.1 791.5 Trade Balance -2.0 -1.4 -15.3 9.0 16.7 24.1 101.9 177.6 Source: International Monetary Fund, Direction of Trade Statistics, and official Chinese statistics. In addition to the data cited above, some highlights of China’s rapid economic rise and current level of economic development are reflected in the following data: ! China’s GDP as a percentage of world GDP rose from 4.5% in 1984 to 16.3% in 2006.5 Foreign direct investment in China rose from $109 million in 1979 to over $72 billion 2005, making it the largest destination for FDI among developing countries and the third-largest overall FDI destination after the United States and the United Kingdom.6 According to the U.S. Commerce Department, China’s middle class (defined as per capita income over $8,000) currently totals 200 ! ! 5 6 Based on purchasing power parity measurements.
By controlling interest rates and the money supply it has controlled inflation and economic growth of our country. About.com. (2012, January 01). Bank reserves and the discount rate. Retrieved from
Deficit spending - Definition Like other institutions, governments operate on a budget -- or try to do so. When the expenditures of a government (its purchases of goods and services, plus its tranfers (grants) to individuals and corporations) are greater than its tax revenues, it creates a deficit in the government budget. When tax revenues exceed government purchases and transfer payments, the government has a budget surplus (as in the late 1990s in the United States). Following John Maynard Keynes, many economists recommend deficit spending in order to moderate or end a recession, especially a severe one. When the economy has high unemployment, an increase in government purchases create a market for business output, creating income and