The Federal Interest Rate and How it Effects Business
Interest is the cost of borrowing money. You pay it in almost every facet of life and business, from taking out a home mortgage, to credit card use, to equipment loans and lines of credit. The rate that you pay or the percentage is not random and is directly correlated to the Federal Reserve Bank’s (The Fed) interest rate. The Fed’s interest rate has an endless effect on how the economy operates and how business is done throughout the world. This effect not only has a direct impact on the stock and bond markets but has an even greater effect on how business operations make decisions and progress in our society. Monetary policy in the United States has been and always will be one This is a hot topic today in regards to how much that reserve is and what type of risk these banks are allowed to take (Congress has and continues to pass legislation concerning regulation in the banking industry). There is also another option for banks to meet their reserve requirements which is an inter-bank loan. These are loans between banks where by the bank that needs to add to their reserve, borrows from another bank that has a surplus in their reserve. The rate is negotiated between the banks but is not set by the Fed. The Fed has a dual mandate: to promote maximum employment and keep prices stable. (Lahart) The Fed is a part Government, part private institution. Although the government does not tell the Fed what rate to set for its Discount Rate (the rate at which it lends money to other banks), the President does appoint the chairman of the bank as well as the other board members who are then confirmed by the Senate. “As stipulated by the Banking Act of 1935, the President appoints the seven members of the Board of Governors; they must then be confirmed by the Senate and serve for 14 years only. Once appointed, Governors may not be removed from office for their policy opinions” (Wikipedia) This policy is viewed to work outside the lines of politics and political opinion. Therefore it is not incumbent on the Fed to create policy based upon the current Presidents economic policy and opinions although as an
Related Documents: Essay about Fed Rate Effect on Business
Most direct indicator of economic growth High production indicates strong economic growth and can result in an increased demand for labor (lower unemployment) National income- total income earned by firms and individual employees Unemployment rate Measures only the number and not the type of jobs that are being filled i.e. new, low paying jobs may have a substantial reduction in unemployment during a period of weak economic growth Does not necessarily indicate the degree of economic growth…
Bank decided to no longer hold excess reserves. Draw new Taccounts showing one possible initial change from this. Calculate the money multiplier. For my example, the bank then uses its $50 B in excess reserves to buy government securities from the Fed. (obviously not the only possibility) The Central Bank T-Account Assets Liabilities Government $250B Currency $200B Securities in Circulation Reserves $50B The Regular Bank T-Account Assets Liabilities Reserves $50B Checking $500B Deposits Government…
Macroeconomics is the core of our everyday lives, it is the macro economy and if doing well will increase the peoples income and the business profits will continue to rise. During the Great Depression of the 1930’s was when macroeconomics was born and has continued to develop. There are three major concerns when looking at the macroeconomic economy and they are price increases, output growth, and job loss. The economy performance in the long run and short run trends are extremely important to the…
Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202 The Federal Reserve System Principles Of Macroeconomics Professor Yamin Ahmad Supplemental Notes to Monetary Policy • The Federal Reserve System • The Federal Reserve System, or the Fed, is the central bank of the United States. • A central bank is the public authority that regulates a nation’s depository institutions and controls the quantity of money. • Controlling the Quantity of Money • Modeling Money: The Money Market Note:…
Key Facts: Ch. 4: Present Value PV = CF/(1+i)n 4 Main types of credit market instruments: 1. Simple Loan = borrow money for n years, receive money + interest PV = CF/(1+i)n - for simple loan, interest rate = yield to maturity 2. Fixed Payment Loan = cash payment every period (PV) LV = FP/(1+i)1 + FP/(1+i)2 + ... + FP/(1+i)n 3. Coupon Bond = coupon (%) payment each year, face value and coupon on last year P = C/(1+i)1 + C/(1+i)2 + ... + C+F/(1+i)n 4. Discount Bond = when n=1…
introduced the model of aggregate demand and supply. Chapter 10 developed the IS-LM model, the basis of the aggregate demand curve. CHAPTER 11 Aggregate Demand II 2 In this chapter, you will learn: how to use the IS-LM model to analyze the effects of shocks, fiscal policy, and monetary policy how to derive the aggregate demand curve from the IS-LM model several theories about what caused the Great Depression CHAPTER 11 Aggregate Demand II 3 Equilibrium in the IS -LM model The IS…
University of International Business and Economics China and USA: A comparison of their Monetary Policies. Mid-term Project School of International Trade and Economics BY Rebecca Bogiri Professor: LIN GUIJIN Beijing, China 2 December 2009 China and USA: A comparison of their Monetary Policies. By: Rebecca Bogiri December 2009 Abstract The monetary policies of USA and China is analyzed here from the perspective of their implementing bodies, their choice of instruments…
usually lent for overnight use Federal funds rate- the interest rate that depository institutions pay to borrow reserves in the inter-bank federal funds market Discount rate- the interest rate that the federal reserve charges for reserves that it lends to depository institutions FOMC directive- a document that summarizes the federal open market committee’s general policy strategy, establishes near-term objectives for the federal funds rate, and specifies target ranges for money supply growth…
Austrian business cycle theory. His three ideas is also mentioned by Chicago school and proponents of Supply-Side economics, Keynesians and Austrian school for each point of view correspondingly. The first idea The purpose of literature The purpose of this chapter is to show how the “system” works, why it generates bubbles, why they eventually burst, and the macroeconomic effects of bubbles. Here we apply the economic understanding of bubbles derived from the Austrian business cycle theory…
It currently does this principally by borrowing newly created money from the central bank and then spending this new money on projects that the private sector is not already engaged in in order to create new jobs and boost the economy, interest rates have to be reduced. That has happened. People are encouraged to borrow to invest and spend. That has happened. As the continuing flow of new money finds its way into the economy, inflation will follow and up will go interest charges again to reduce…
