# Financial and Economic Analysis

Better Essays
1829 Words
Grammar
Plagiarism
Writing
Score
Financial and Economic Analysis
Financial and Economic Analysis (BMBA 9113)
Problem Set II (130 points)

Directions: Answer the following problems IN DETAIL. Your analysis must be typed and should be free of grammatical errors and “slang” terms.” Wherever appropriate, make sure you supplement your discussion with graphical analysis and equations. The graphs may be hand drawn, but please make sure they are neat. There are no restrictions or requirements on working in groups. The one exception is that each person must hand in his/her OWN work. In economic terms, there are no input restrictions; however, the output MUST be yours.

1. (15 points) The accommodative policies of the Federal Reserve System, the European Central Bank, and the Bank of Japan involve the purchase of fixed-income securities to infuse liquidity into their respective economies for the purpose of stimulating economic activity. Using the “money line-spending line” diagram and aggregate demand and supply curves, depict a situation in which monetary accommodation will not produce the intended outcome. Apart from the graphical analysis, what is a reason to doubt that the policies will work as intended?

2. (5 points) Returning to the first problem set, which of the five companies are most likely to be impacted by the increase in global liquidity? Why? Do their betas tell you anything?

3. (10 points) A popular financial newsletter called the Zweig Forecast states the following: "In a nutshell, easier money and lower interest rates are bullish; tighter money and higher interest rates are bearish" (Martin E. Zweig 's italics, not mine). Is this really true? Let us test this assertion with the following model on stock prices:

SPt = b0 + b1iTt + b2Mt + et

where SPt = annual stock price index -- the S&P 500; iTt = annual yield on long-term Treasury bonds; Mt = annual M2 in real (1982-84=100) dollars; and et = error term.

The results were generated from 40 years of data through

## You May Also Find These Documents Helpful

• Good Essays

The purpose of this assignment is to prepare a paper U.S. Federal Reserve monetary policy that characterizes the state of the economy. This paper will describe the primary concern in which the Federal Reserve currently has in regard to the economy. In addition, this paper will provide the stated direction of recent policy as it affects the economy. Finally, an explanation of the current actions by the Federal Reserve that confirms the…

• 711 Words
• 3 Pages
Good Essays
• Satisfactory Essays

This week’s topics include credit markets’ effect on the economy, as well as global economic conditions regarding trade and specialization business decisions. Concepts discussed include credit markets and the role of the Federal Reserve in creating money and controlling the money supply, as well as how economies interact with one another. The readings for the week address the role of the Federal Reserve and foreign exchange. These concepts emphasize the role of central banks in global financial crises and the tools they must utilize.…

• 424 Words
• 2 Pages
Satisfactory Essays
• Good Essays

On October 23 and 24 the Federal Reserve Open Market Committee held a meeting to discuss what they need to do or continue to do to stimulate the economy. According to the statement consumer spending has increased, but investment in companies has continued to decrease. They also said that inflation has increased which causes energy costs to go up, but the expectations are looking good. The Fed decided that continuing to buy securities would be a good idea since they are trying to lower the long-term interest rates. Their plan is to continue purchasing these mortgage backed securities until the labor markets improve. They will also plan on purchasing more assets if that is the case. The Committee wants to continue extending the holding of Treasury securities, and it is keeping the policy of reinvesting principal payments from the holding of agency debt and agency mortgage-backed securities. Their goal by doing this is to keep the Federal funds rate between 0 and .25%. All of this will increase securities held in the long run. They influence the interest rates by buying securities through open market operations. The Committee decided that the economy is getting better but too slowly so that is why they decided to take these actions to try and increase the speed. According to The New York Times article , they want to max out employment and price stability, which will help stimulate the economy. After reading the Committee’s statement I have concluded that they are using expansionary policies or “easy money policies”. I figured they are doing this since they are buying and holding their securities in an attempt to raise the aggregate demand. I do agree with what the Fed is planning to do in an attempt to stimulate the economy. I this it is a good idea since our economy is still in somewhat of a slump to use the easy money policies to increase the aggregate demand by changing the interest rates. Overall I agree with…

• 394 Words
• 2 Pages
Good Essays
• Good Essays

The purpose of this paper is to evaluate the Federal Reserves’ discount rate, monetary policy, and stimulus program through the money multiplier.…

• 689 Words
• 3 Pages
Good Essays
• Satisfactory Essays

X-Ray machine – Capital Lease – Useful life is 15 years; Option of buying the equipment at a bargain price later…

• 348 Words
• 2 Pages
Satisfactory Essays
• Powerful Essays

Two of the major competing companies that manufacture drinks are Coca-Cola, and Pepsi. They both produce regular water, flavored water, and soft drinks of many kinds. While this essay will explain what vertical and horizontal analysis is, it will also explain each company’s vertical and horizontal analyses. Also the ratios for each company will be given, and several examples as to how each company can improve in their financial status. The financial analysis of both companies is very important so both businesses can understand how they are being managed.…

• 1746 Words
• 7 Pages
Powerful Essays
• Good Essays

During 2012, the already weak recovery from the recession weakened further. At the same time, inflation rate remained close to Fed’s target rate of 2 percent. The Fed has dual mandate from Congress to strive for both low inflation and low unemployment. It was meeting its low inflation rate, but unemployment remained stuck above 8 percent, after having fallen from its peak of 10 percent. Under the QE3 program, launched last September, the Federal Reserve is buying long-term Treasury and mortgage-backed securities to pump more liquidity into the economy in a way that will maintain downward pressure on long-term interest rates. The Fed hopes the lower interest rate will stimulate the economy to expand via capital new investment and specifically, to grow more jobs.…

• 667 Words
• 3 Pages
Good Essays
• Good Essays

This paper will focus on the Federal Reserve and the American economy. The American economy is not doing well at all compared it successes in the past. Tuesday, January twenty ninth the Dow Jones industrial average fall to almost 600 points. (Gross, Daniel. The U.S. Economy Faces the Guillotine, Newsweek). The United States economy has entered a time of economic trouble. People are losing there jobs. The prices of products continue to rise, while the American dollar continues to lose its value. There is a suspicion that America is quickly heading for a recession and we are taking the global economy with us.…

• 716 Words
• 3 Pages
Good Essays
• Powerful Essays

Expansionary policy is a macroeconomic policy that seeks to expand the money supply to encourage economic growth or combat inflation. One form of expansionary policy is fiscal policy, which comes in the form of tax cuts, rebates and increased government spending. Expansionary policies can also come from central banks, which focus on increasing the money supply in the economy. The U.S. Federal Reserve employs expansionary policies whenever it lowers the standard fed funds rate or discount rate or when it buys Treasury bonds on the open market, thereby injecting capital directly into the economy. I will focus this paper on these policies and theories, and how the federal government would engage them in an effort to move the economy out of a recession.…

• 2103 Words
• 9 Pages
Powerful Essays
• Satisfactory Essays

Quantitative easing has not increased the rate of inflation with the main reason being that banks have held on to the newly created money supply as excess reserves. Traditionally, when the Federal Reserve engages in bond buying or mortgage-backed securities purchasing it usually promotes growth in the money supply. Prior to 2008, banks were required to keep a certain reserve percentage of checkable deposits, around 10%, and any excess over this amount would not make any interest, with the cost of holding on to these excess reserves being the opportunity cost of the interest the excess reserves could have generated if lent out, so banks had no reason to hold on to excess reserves. After 2008, however, the Federal Reserve began to pay interest on these excess reserves, and with the massive influx of money supply generated because of the QE program the Fed launched in the same year, banks began to hold most this new money supply, over \$4 trillion now, as excess reserves, over 81.5%. When looking at the money supply formula, M = m*MB, when expanding the money multiplier we have (1+c)/(r+c+e) with e being excess reserve ratio, E/D, as part of the denominator. As banks hold on to more and more of this new money supply as excess reserves, the excess reserve ratio increases which in turn increases the denominator in the money multiplier. A higher denominator leads to a smaller money multiplier, and even though there has been an increase in the monetary base, an increase in excess reserves leads to small money multiplier meaning that there has been little money expansion. This shows that excess reserves is negatively related to money supply. This explains why Quantitative easing has not increased the rate of inflation, because banks have held on to the newly created money supply as excess reserves, effectively halting monetary expansion. Since little money has entered the economy, inflation rates have been proportionally low and it is why QE has had…

• 334 Words
• 2 Pages
Satisfactory Essays
• Good Essays

CFA 3 formulas (copied) Study online at quizlet.com/_76ths 1. # Equity contracts (equation): 10. Basic expression relating forward and spot prices (equations - multiple): 2.…

• 739 Words
• 3 Pages
Good Essays
• Good Essays

The failure and futility of a 0.25% interest rate combined with low aggregate demand, greater market uncertainty and a sluggish recovery from a US economy coming out of the deepest recession since the 1930’s, has directed the US Federal Reserve to introduce quantitative easing.…

• 985 Words
• 4 Pages
Good Essays
• Satisfactory Essays

• View bonds as alternative to holding money. Affected by monetary changes. • Special issues: Flexible versus “sticky” prices. DEFER.…

• 1546 Words
• 7 Pages
Satisfactory Essays
• Satisfactory Essays

Eurozone is in the middle of a big economic crisis, which affects not only the members of the union but the whole world. However economic performance varies from country to country, Eurozone countries follow fiscal policies in order to generate profits, specifically from the countries that deficit is equal or grater to 3%. Eurozone as a whole has a debt percentage exciding 60%. Last month, Mario Draghi European Central Bank President seeks to protect Eurozone’s fragile economy by keeping doors open to Quantitative easing. The target of that measure is to lower the interest rates and increase the money supply within the European Union. It’s the first time that ECB’s loans governments came with ultralow financing rates of 0.15%. Defining his measure Quantitative Easing means, to increase the money supply by lending money to financial institutions thus promoting lending to investors and increasing liquidity. However as it is mentioned in the aricle ECB’s measures will fall flat if Governments fail to make the necessary reforms to create more flexible economies. Quoting his thoughts “Courageous structural reforms and improvements in the competitiveness of the corporate sector are key to improving (the) business environment, No monetary—and also no fiscal—stimulus can ever have a meaningful effect without such structural reforms " Mr. Draghi said.…

• 349 Words
• 1 Page
Satisfactory Essays
• Powerful Essays

## Note

• 2859 Words
• 12 Pages

References: 1. “The Science of Monetary Policy: A New Keynesian Perspective” by Richard Clarida; Jordi Gali; Mark Gertler in Journal of Economic Literature, Vol. 37, No.4 (Dec 1999).…

• 2859 Words
• 12 Pages
Powerful Essays