ECO202
PART I: Module 4 – Case
- Tools used by the Federal Reserve policy makers so as to influence the money supply and interest rates
Monetary policy is used to mean the varied methods that are applied by the central banks so as to have an impact on the supply and demand of money as well as the interest rates. The Federal Reserve is the overall head on the monetary policy in the United States Central Banks. A good example is that the Federal Reserve can issue contractionary or expansionary policy tools so as to have an impact on the country’s money supply (Newyork Fed, 2013). For instance, banks are able to loan their money if the Federal Reserve policies on reserving. This is because a declined rate leads the banks to continue having limited reserves considering that it does not cost much to acquire money to meet the shortages, a drop in the discounts rate has corresponding results (Estrella and Trubin, 2006). Alternatively, contractionary policy tools bring down the supply of money. The central banks in most cases are charged with these processes so as to control inflation. Contractionary procedures are composed of increasing the discount rate and supplementing the roles of reserving that is done by banks. The first one is however quite expensive for such financial institutions to fall short of reserve obligations, making them to make use of a limited lending as the latter lowers the money that can be acquired for loaning. These steps makes borrowing to be quite expensive considering that they elevate the interest rates.
One way that the Federal Reserve policy makers are able to manage the supply of finances is through changing the reserve obligations of the financial institutions. It is quite clear that limited changes in the amount of money have the ability to bring huge changes for the money that is accessible. This has the ability to affect adversely the economy. It is hence due to this that policy maker are not supposed to apply this method frequently. Subsequently, the Federal Reserve only changes the reserve obligations in similar situations. Likewise, the amount of currency on the margin is no enough, in regard to the fiscal foundation, to bring about a more notable difference in the supply of money. It is hence due to this that the Federal Reserve does not in most cases change the Federal call rate for the stock market. Moreover, the loans acquired by the financial institutions in most cases are too high when compared to the discount rate that is needed by the Federal Reserve. This could be the reason as to why financial experts consider this discount rate as the discount loan. On the whole, it is clear that the financial institutions are supposed to borrow more money according to their ability from the Federal body and then increase the gains by limiting their interest spending. If it happens that the Federal boy limits or increases the discount rate, then the financial bodies will know that they are changing monetary policy hence improving or limiting their charges. Alternatively, the financial bodies in most cases acquire from other financial bodies that have excess money in any case they need money to meet the temporary liquidity issues.
The other tool is that policy makers use is the open market method. This method is composed of buying and selling of government bonds in open market. It is through this that the Federal Reserve meets the price for treasury bonds with money and acquires bonds from financial bodies or investors if they buy them in open market. Additionally, they keep this money into banks hence elevating its supply (Estrella and Trubin, 2006). This method vividly shows that the Federal Reserve brings to a high the money supply. Hence, in the case that there money supply is high; the value goes down hence limiting the interest rates. They can make this happen by selling bonds in the open market. It is hence through this that banks and investors will acquire bonds as they give the money. Therefore, this brings about a drop in the supply that lowers its value, hence a high interest rate. This shows that the open market makes use of reserve method that improves the money supply hence limiting the interest rates or limiting the money supply hence a huge interest rate. This is the best method for managing money supply and interest rates.
- The relationship between short and long-term interest rates as the time to maturity of the debt increases
Monetary policy has the ability to manage the gradient of the output curve in connection to the interest rates. The short period interest rates increase due to a stretched monetary policy. This brings about a drop in the inflationary forces. Hence anticipation of a method that would lower the rates after these forces fall. This shows that because of the stretching, the short-term interest rates go up. Alternatively, long-term interest rates may reflect bigger desires (Wu, 2001). Nonetheless, the high short-term interest rates show a poor economy and pressure of the output curve. Similarly the long term rates go opposite often. This shows that the two interest rates may later the output curve.
Long term rates are bigger as evasion is possible with time if the borrower acquires a number of poor shocks and forms debts. Moreover, are due to the risk premium on the changes made in evasion. Conversely, in high debts and lower income, evasion may happen hence interest increase. This increase is by a smaller size in regard to the short rates due to high probability of paying back. The rates change with time, hence when the long term rates are high when the interests are low. But when interests are high the difference between short and long term rates contract and may overturn.
- Impact on bonds if the Federal Reserve uses expansionary or contractionary policy
The choice to offer bonds shows the contractionary and expansionary monetary policies by the Federal Reserve. Hence the borrower experiences constant income shocks and may offer short or long bonds period. He or she may escape debt but faces expenses for this. This is brought about by evading the global financial markets and small incomes. In balance, avoidance leads to high debt and short income periods when rate of debt repayment exceeds the rate of avoidance (Wu, 2001). Hence the bond charges repay for the loss and risk. For huge businesses, the management gives bonds if the federal body uses expansionary policy. This is since it results to lower interest rates. Therefore, bonds are poor in regard to equities hence high equity costs. At low interest rates, because of a low expansionary policy less risk-prone borrowers acquire loans. This leads to lenders willing to loan. Moreover, expansionary policy increases bank deposits and reserves hence high bank loans acquired therefore high loans leading to more investment and spending.
The heads of the businesses ought to issue bonds after a year if the Federal body uses contractionary policy. This is since the policy will cushion the borrowing price. Hence the short periods leads to a slight burden to clients. This leads to ‘cost channel’ that limits demands. Moreover, high long-term bonds limit the bond charges. It is believed that the supply impacts the term used by altering the market price of the risks. There are similarly several media that contractionary monetary policy limits excess stock market returns. Additionally, the contractionary policy leads to high inflation which is due to confidential information based on future inflation or if shocks go above the borrowing price of the businesses.
PART II: Module 4 – SLP
- Assess the overall financial health of Ford Motor Company? What are good and bad signs, if any, in your assessment?
Ford Motor Company is a US automaker. The company has been able to drug itself from poor investment by changing its production strategy into an international company as it invests in new technology. The company has made use of layoffs and plant shut down so as to limit the size and limit inefficiencies. This has been so as to become a thinner and more rigid company. Additionally the manufacturing process has been made more dynamic leading to saving money as the products are fast getting developed and improved delivery of innovations. Its operations are improving the investments all over America, the remodeling in Europe and the major investments in new tools enable it to get involved in fast growing markets in Asia and Africa.
The sales for Ford have improved going over the 2 million mark making it the best-selling brand in the US (Dueker, 1997). It has become the only company to get above 2 million marks. In 2012, its sales grew by 2% for a year. The sale of small cars grew by 29% having market in California. Its retail sales grew by 83% in the same year when compared to 2011. These are good signs for the coming future.
- Ford Motor Company financial health impact through the fiscal and monetary policy
The health of the company is reliant on the health of economy. The monetary policy sets the standards for the economy. With poor interest rates, the cars are affordable hence more chances for employment and vice versa (Ford Motor Company, 2013). This brings about low taxes by the Ford and limited chances for employment insurance payouts which does affect fiscal policy.
As for the fiscal policy, there are more severe during financial crisis where they need bailouts so as not to shut down. These financial incentives are vital so as to safeguard employment. With Ford Motor Company’s return to capital market, the tax payers may burden the money used to save the company.
PART III: Module 4 – TD
- What functions of federal government, if any, would you want to see eliminated?
The only basic duty for the federal government is the national defense and undertaking the foreign policy. Hence in a reduced federal government there are just two departments that are needed; the Department of Defence and State. All of the others have to be done away with.
First for the Department of interior and Agriculture, the federal government has to auction its lands and minerals so as to pay the national debt. As for the Department of education, the public education systems would be sold to private systems for much improved education. Going to the health and human services, there would be no charges for the citizens and no programs.
Doing away with the transportation department means no highway systems among others as well as federal gas. Selling them would make them to be toll roads. Doing away with the department for housing means no more insured mortgages and grants. As for the social security and Medicare they would have to get family help relieving the government of any duties. Additionally, the homeland security and defense would be joined.
It is through this and other removal of federal functions removed that the government will have little to do. The tax to be charged would be small and easy to manage and out to meet the needs for the two federal functions.
References
Dueker, M. J., (1997). “Strengthening the case for the yield curve as predictor of U.S. recessions”. Federal Reserve Bank St. Louis Review, Vol. 79. pp. 41-51.
Estrella, A., and M. Trubin, (2006). “The Yield Curve as a Leading Indicator: Some Practical Issues”. Federal Reserve Bank Of New York, Vol. 12, No:5.
Ford Motor Company (2013). Retrieved from: http://www.ford.com
Newyork Fed (2013). The Yield Curve as a Leading Indicator. Retrieved from: http://www.newyorkfed.org/research/capital_markets/ycfaq.html
Wu, T., (2001). “Monetary Policy and the Slope Factor in Empirical Term Structure Estimations.” FRB San Francisco Working Paper 2002-07.
