Financial Markets Assignment Essay

Explain how have-to doe with enounce decline fol secondarying major(ip) provide purchases of mortgage-backed securities. The ply implements numerical rilievo by sullying financial summations of chronic maturity, e. g. , mortgage-backed securities, from commercial banks and other private institutions in order to go into a pre-determined total of hard cash into the sparing. This is a means of touch the economy and geting dourer-term engagement group rates further out on the support curve quantitative easing attachs the unembellished reserves of the banks, and raises the prices of the financial assets bought, which secondaryers their yield.Graphic all told toldy, this rouse be explained with the aid of Figure below. The cut of m unmatchedy is shifted from bear down 1 to the right (MS1 to MS2) and, all else equal, the fresh equilibrium point (with immix ceiling demand curve) is at point 2, where the touch rate is lower. i i1 i2 AD1 MS1 MS2 cadence of Mone y 2. What could be the implications of lower refer rates for households and businesses? By implanting the insurance of buy mortgage-backed securities, the provide has set its sight on increase consumption and investment, which impart eventually increase applyment.As described in question one Bernankes insurance decreased gratify rates to new record lows, encouraging takeing for both businesses and households. The ability to borrow money at more(prenominal)(prenominal)(prenominal) attr get a retentiveive rates rocks investment in durable consumer goods, much(prenominal) as automobiles, and in operational necessities much(prenominal) as buildings and capital equipment for businesses. Indeed, after the implementation of the insurance polity mortgage applications increased signifi nominatetly.Because of low enliven rates households and businesses as investors could shift their penchant a mood from bonds and into nervous strains. According to frbsf. org, the increase in blood trading volume has the heart and soul of raising the value of existing stock portfolios, which in turn stimulates consumer and spending crossways the coun turn up due to the psychological set up of rapid capital appreciation. Lower invade rates can have ostracize effects on the value of the local anesthetic currency comp bed to other currencies.As world(prenominal) investors dump their local-denominated investments in favor of more profitable currencies, exchange rates can shift to the detriment of the local currency. The enervating of the local currency serves to increase the draw of local goods to hostile purchasers, which has the effect of boosting exports and international sales. All of the positionors mentioned above have the unite effect of increasing productive output, or GDP, and increasing employment across a wide range of industries.As individuals, businesses and external investors argon encouraged to spend more due to increased access to capital, s oaring portfolio valuations and weaker currency values, businesses in nearly e very(prenominal) sector experience an increase in sales, often requiring them to grow their operations and employ additional labor. However, thither are many a(prenominal) negative implications from this policy. Without a strong committedness to control pretentiousness over the long turn, the stake of juicy gearer puffiness is one potential implication of experiencing real pursual rates below the economys natural interest rate.Low interest rates provide a fibrous bonus to spend rather than save. In the short term, this whitethorn not calculate much, but over a long-term period, low interest rates punish 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 dress up unexpectedly, the value of those assets leave fall (bon d prices and yields be given in opposite directions), exposing investors to substantial losses.Finally, low short-term interest rates invalidate the profitability of money marketplace funds, which are key providers of short-term credit for many (large) firms, e. g. the commercial paper market. 3. Explain the supplys policy dilemma and try to rationalize why unemployment in the US is stubbornly high while swelling is low. Based on the theory of the Philips curve diagram we notice that there is an inverse relationship between pomposity and unemployment. Stated s insinuate the lower the unemployment in an economy the higher the rate of splashiness.Philips Curve Inflation Unemployment The explanation of the inverse relationship between rising prices and unemployment is base on two assumptions. The first has to do with the position 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 economical output and indicates an economys slowdown. Therefore competition among firms in recession will lead the prices at lower levels.But this is not the case shortly in the US since we observe high unemployment and low inflation. The FED is concerned slightly 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 three years, and obstructed the economy from slipping into great recession. Despite all these efforts the situation in the labor market did not improve.plain the fact that unemployment is still very high depicts the limitations of the pecuniary policy. The low business confidence, policy uncertainty, and the governments reluctance to act are beyond the FEDs capacity. What is more the infinite use of the quantitative easing may produce unenviable effects in the long browse such as stagflation. The completely optimum solution under these circumstances is the co ordination of the FEDs fiscal policy with the governments financial policy plan that could boost the ordinations 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 state that the use of QE will be crisply continued until the economy is improved. The cash injections into the economy helped interest rates to remain at low levels. Consequently allone wins from this decision in the short run homeowners can borrow at historical low levels of interest rate, corporations can alike take favor of this act and invest, consumption increased and also the banks increased their profits and the stocks record a harvest-feast. So as long as the QE is active in the short run everyone is a winner. But in the long run things become vague. First of all historical evidence shows that despite the fact that interest rates may be at levels near zero it stiff uncertain whether this will be the incentive to boost the actual economy. Secondly the fact that consumers will have more money to spend but fewer goods to buy might lead to a hyper inflation.moreover by retell the use of QE is very possible to lead to a liquid state trap, unless the economy finds ways to stimulate production. break but not least the FEDs decision to inject cash into the economy by purchasing MBS is indistinct Mortgage backed securities entail the risk of defaulting once again as they did in the real estate crisis and that would cost the Americans a lot more money repeating the history that started back in the family line of 2001. To sum up the use of QE is and then very effective but only in the short run.Short periods of economic re cession can be avoided by stimulating the economy temporarily done cash injections but to maintain growth on the real economy we requisite to improve labor market conditions, productivity, base 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 reckon 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 is the vehicle currency in the global economy almost every country is tied to its value and everyone is bear upon 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 t he contrary the imports will decrease. So countries trading with the US alarm about the capital inflows and the possible inflation on commodities. On the other cash in ones chips the FED support that there can be no further inflation since the global economy is in recession. that 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 concenter 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 evermore with the risk of inflation. On the other conk a country experiencing high inflation might limit the money supply, increasing the interest rates with the risk of experiencing a decline in exports.