Monetary Policy: Money, Credit, the Federal Reserve, and Interest Rates

Money supply and interest rates are important to individuals and businesses making decisions to finance purchases. The following articles assess conditions for financing purchases and important aspects of monetary policy. Read both and respond to the four questions in a 4 to 5 page report.

The Federal Reserve has written an interesting article on yield curves as a leading economic indicator
http://www.newyorkfed.org/research/capital_markets/ycfaq.html

Please repeat the questions below on the title page of your paper

1. The Federal Reserve policy makers use several different tools to influence the money supply and interest rates. Identify and briefly describe these tools. Include in your answer the difference between expansionary and contractionary monetary policies.

2. The lin k below takes you to a site that shows you various Treasure security yields and how short and long-term yields differ. This is called the term structure of interest rates and when graphed it is called a yield curve. What is the relationship between short and long-term interest rates as the time to maturity of the debt increases?

http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

For an explanation of a yield curve you can go to:

http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.sht ml

3. For the past 3 years a major department store chain has averaged approximately $10 billion in long-term debt. Their debt is in the form of bonds that have been sold to investment funds and the public (If you are not sure what a corporate bond is look it up on the internet). For the sake of argument, let us assume that either now or one-year from now they will add an additional $5 billion to finance store expansion. This is a given, management has already made this expansion decision and it does not need to be commented on. The objective of management is to issue bonds at the lowest interest rate. Given this objective, should they issue the bonds now or wait for one year if they feel the Federal Reserve will follow:

a. an expansionary policy?

b. a contractionary policy?

Case assignment expectations:

Use information from the modular background readings as well as any good quality resource you can find. Make sure you cite all resources you use and provide a reference list at the end of your paper.

LENGTH: 4 typed and double-spaced pages.

In addition to the overall quality, depth, grammar, and organization of the paper, the following will, in particular, be assessed:

1. The level understanding of the link betwe en Federal Reserve actions and its affect on interest rates and monetary policy

2. Your ability to understand the link between current and prospective economic conditions and making decisions about major long-term financial commitments.