Macro11C Essay Example | Topics and Well Written Essays - 1250 words

Macro11C - Essay Example The higher the RR, the lower the amount of money lent by banks and vice versa. 3) Federal funds rate (FFR): The FFR refers to the rate at which banks lend each other money overnight in order to maintain the reserve requirement. If the FFR is high, banks would be unwilling to lend beyond the reserve requirement and vice versa. 4) Discount rate (DR): The DR refers to the rate that the federal reserve charges the bank if it wants to borrow money from it in case when the money is not available to be borrowed from other banks. The DR is usually higher than the FFR. The open market operations are the most widely used tool for controlling the money supply in the market. The decisions for these open market operations are made during the Federal Open Market Committee meetings which since 1981 have been held 8 times at regularly scheduled times each year. These open market operations change the money supply without impact the money multiplier. The most powerful tool that the Fed has to control the monetary policy is the Reserve Requirement. Changing the RR not only impacts the money supply but also the money multiplier as it directly influences the bank lending. ... Easy money policy: To fight recessions, the Fed can use its monetary policy tools to increase the growth of money and credit, which tends to lower interest rates and spur growth of the economy. This monetary policy is said to be easy or expansionary. Tight money policy: To restrain inflation, the Fed can use its monetary policy tools to reduce the growth of money and credit, which tends to raise interest rates and slow the growth of the economy. This monetary policy is said to be tight or contractionary. For the easy money policy, first the MS increases which causes the interest rate to decrease which causes the amount of investment to increase. This causes AD to increase leading to a higher real GDP and a little inflation. The implementation in reality is done by the Fed by buying securities from banks and/or reducing the reserve ratio for banks, the FFR and the DR. For the tight monetary policy, first the MS decreases which causes the interest rate to increase which causes the amou nt of investment to decrease. This causes AD to decrease leading to a lower real GDP and a decrease in price levels. The implementation in reality is done by the Fed by selling securities from banks and/or increasing the reserve ratio for banks, the FFR and the DR. Q3: Comment on the theory underlying the use of a monetary rule by the Federal Reserve. Does the use of such a rule seem appropriate under current economic conditions? Explain. The theory underlying the ue of monetary policy by the Federal Reserve is also known as the Taylor Rule. It is an interest rate forecasting model invented by John Taylor in 1992 and described in his 1993 study called â€Å"Discretion Vs. Policy Rules in Practice". In general, the Taylor rule mean that for a 1% increase in

Critically analyse how the government debt problems initially faced by Essay - 4

Critically analyse how the government debt problems initially faced by a few relatively small economies could trigger such a wide impact in financial markets - Essay Example Though the amount of exposure of each country and each financial market to the financial market of another country varies but the fact remains that no country can be considered as isolated in respect of interconnectedness. This particular essay discusses the effect of financial crisis on two particular markets that is derivative market and foreign exchange market. The essay tries to find the possible reasons due which financial crisis started from a particular country with a small economy gradually effects the financial markets globally. In this respect of this analysis both fundamental and identifiable factors are tried to be identified. Throughout centuries there have been several financial crises that have had large scale impact on the overall financial system. Different crisis in different timers have been triggered by different factors. However although there have been various triggering factors for different crisis the impact levels of the crisis have also varied depending on their reach and spread. A few examples of such crisis in the past are Asian crisis, Japan Crisis, Crisis of the Nordic countries. However the financial crisis of the dimensions of European financial crisis is unprecedented. The massive scale of the crisis was caused by two related factors the banking crisis and the crisis of the bond market (Ullah and Ahmed, 2014). The crisis first broke in 2007 when the banks felt uncertain about their investments in certain complex financial instruments. They increased interbank lending rates and virtually stopped lending to other banks. This led to serious liquidity problems for the banks in the short r un. At that time it was felt that the problem was more specific particular institution and those particular institutions may face default risk. However after default of major banks like Lehman Brothers, and risks concerning AIG which in turn took more financial institution with them in their downward