Financial Markets Assignment Essay

Explain how kindle evaluate slide down fol clinical depressioning major Fed purchases of mortgage-backed securities. The ply implements numeric fill-in by buying financial as lops of considerableer maturity, e. g. , mortgage-backed securities, from commercial-grade banks and another(prenominal)(a) private institutions in straddle to inject a pre-determined quantity of bullion into the thriftiness. This is a means of stimulating the prudence and commenceing longer-term chase pass judgment further out on the yield curve quantitative easing change magnitudes the excess reserves of the banks, and raises the sets of the financial assets bought, which imprinters their yield.Graphically, this hind end be explained with the aid of bet below. The supply of notes is prisonbreaked from tier 1 to the right (MS1 to MS2) and, all else equal, the impertinent equilibrium point (with aggregate money demand curve) is at point 2, where the delight rate is lower. i i1 i2 AD1 MS 1 MS2 Quantity of Money 2. What could be the implications of lower amuse grade for households and businesses? By implanting the form _or_ system of government of purchasing mortgage-backed securities, the provide has set its sight on change magnitude inspiration and investment, which pass on ultimately increase employment.As described in question one Bernankes insurance decreased interest rates to new record lows, encouraging acceptance for both businesses and households. The ability to borrow money at more(prenominal) than piquant rates enkindles investment in durable consumer goods, such as automobiles, and in operational necessities such as buildings and capital equipment for businesses. Indeed, after the implementation of the policy mortgage applications increased signifi heaptly.Because of low interest rates households and businesses as investors could shift their preference away from bonds and into stocks. According to frbsf. org, the increase in stock vocation volume has the belief of raising the value of existing stock portfolios, which in turn stimulates consumer and spending across the coun give due to the psychological make of rapid capital appreciation. Lower interest rates can bedevil ostracize effects on the value of the local anesthetic currency compared to other currencies.As foreign investors dump their local-denominated investments in favor of more economic currencies, exchange rates can shift to the detriment of the local currency. The change of the local currency serves to increase the attractiveness of local goods to foreign purchasers, which has the effect of boosting exports and international sales. All of the detailors mentioned above have the combined effect of increasing productive output, or GDP, and increasing employment across a blanket(a) range of industries.As individuals, businesses and foreign investors are encouraged to spend more due to increased access to capital, senior higher portfolio valuations a nd weaker currency values, businesses in to the highest degree e truly sector experience an increase in sales, often requiring them to engender their operations and employ additional job. However, in that location are some negative implications from this policy. Without a strong commitment to control pompousness over the long figure out, the risk of higher puffiness is one potential implication of experiencing existing interest rates below the thrifts natural interest rate.Low interest rates provide a powerful incentive to spend rather than save. In the short term, this may not field much, simply over a longer period, low interest rates penalize savers and those who rely heavily on interest income. If short-term interest rates are low relatively to long-term rates, households and firms may overinvest in long-term assets, such as Treasury securities. If interest rates uprising unexpectedly, the value of those assets will fall (bond prices and yields move in opposite direc tions), exposing investors to existent losses.Finally, low short-term interest rates reduce the profitability of money market funds, which are key providers of short-term credit for many (large) firms, e. g. the commercial paper market. 3. Explain the Feds policy dilemma and try to rationalize why unemployment in the US is stubbornly high duration inflation is low. Based on the theory of the Philips curve draw we notice that there is an inverse relationship between inflation and unemployment. stated simply the lower the unemployment in an economy the higher the rate of inflation.Philips Curve Inflation Unemployment The explanation of the inverse relationship between inflation and unemployment is based on two assumptions. The first has to do with the fact that as unemployment rises there is no room for workers and labor unions to demand an increase so a wage inflation that would increase the prices of the final products cannot occur. Secondly high unemployment is a reflection of the decline in economic output and indicates an economys slowd take. Therefore competition among firms in recession will have the prices at lower levels.But this is not the case currently in the US since we observe high unemployment and low inflation. The FED is concerned or so the unemployment rate and in an effort to stimulate the economy and improve the labor market conditions it started implementing the quantitative easing policy. So the FED purchased MBS, helped banks to rebuilt their balance sheets, contributed into maintaining price stability, preserved interest rates near zero for more than troika years, and prevented the economy from slipping into greater recession. Despite all these efforts the situation in the labor market did not improve.Apparently the fact that unemployment is still very high depicts the desexualiseations of the monetary policy. The low business confidence, policy indeterminatety, and the governments reluctance to act are beyond the FEDs capacity. What is more the infinite use of the quantitative easing may produce unsuitable effects in the long run such as stagflation. The entirely optimal solution under these circumstances is the co ordination of the FEDs monetary policy with the governments fiscal policy plan that could boost the societys confidence. . Do you think that another(prenominal) round of quantitative easing (QE) by the Fed would help stimulate the US economy? Please explain. The FED declared that the use of QE will be aggressively continued until the economy is improved. The hard cash injections into the economy helped interest rates to remain at low levels. Consequently all(prenominal)one wins from this decision in the short run homeowners can borrow at historical low levels of interest rate, corporations can also take advantage of this act and invest, consumption increased and also the banks increased their profits and the stocks record a growth. So as long as the QE is active in the short run everyone is a winner. But in the long run things become vague. scratch of all historical evidence shows that despite the fact that interest rates may be at levels near zero it remains uncertain whether this will be the incentive to boost the actual economy. Secondly the fact that consumers will have more money to spend but less goods to buy might lead to a hyper inflation.Furthermore by reiterate the use of QE is very possible to lead to a liquidity trap, unless the economy finds ways to stimulate production. Last but not least the FEDs decision to inject cash into the economy by purchasing MBS is questionable Mortgage backed securities entail the risk of defaulting once again as they did in the real estate crisis and that would cost the the Statesns a dish out more money repeating the history that started back in the kinfolk of 2001. To sum up the use of QE is indeed very effective but barely in the short run.Short periods of economic recession can be blocked by stimulating the economy temporarily through cash injections but to maintain growth on the real economy we contract to improve labor market conditions, productivity, innovation and bolster the economys confidence. So a combination of fiscal and monetary policy is the only way to prevent an economy from collapsing, and also is this is the only way to avoid a possible systemic risk that will negatively mint all the institutions and individuals. . How is a loose Fed monetary policy in the US affecting fundamentals (such as inflation, asset and commodity prices) in other countries? What does that imply about global monetary policy? Since the dollar bill is the vehicle currency in the global economy almost every country is tied to its value and everyone is affected by the monetary decisions of the FED. By the QE, the supply of dollars is increased and consequently the dollar depreciates against foreign currencies.This means that Americas exports will increase and on the contrary the imports will decrease. So countries trading with the US fear about the capital inflows and the possible inflation on commodities. On the other hand the FED support that there can be no further inflation since the global economy is in recession. Moreover countries experiencing huge capital inflows resulting in inflation can implement fiscal policy, such as imposing taxes, in order to contain the effects of foreign capital inflows which push up local stock prices and the currency itself.Every country should focus on its own monetary policy adjusting it to the problems that may experience. For example the US chose to inject more money in the economy. The results of such a decision are low interest rates, more exports but always with the risk of inflation. On the other hand a country experiencing high inflation might limit the money supply, increasing the interest rates with the risk of experiencing a decline in exports.