Monetary Policy Effectiveness And Stock Market Cycles

the way the economy is behaving based on the facts that borrowers would be willing to borrow

In order for the Federal Reserve to fulfill their goal of moderate long term interest rates, stable prices and maximum employment, they rely on developing strategic changes to the monetary policy. Through monetary policy changes, the Federal Reserve can either restrict or encourage economic growth and inflation, thereby molding the macroeconomy into a state of consistent health. Overall, there are three tools used to modify the monetary policy, they include reserve requirements, discount rates, and open market operations. In an effort to promote price stability within the economy, these tools influence monetary conditions by affecting interest rates, credit availability, money supply and security prices. While one tool is use more frequently than the others, all three are necessary in establishing stable economic conditions.

The nation's monetary policy is set up by the Federal Reserve in order to support the aims and objectives of better employment, stable prices and a suitable and logical long term interest rates. One of the main challenges that are faced by policy makers is the stress among the aims and objectives that can occur in the short term and the fact that information regarding the economy becomes delayed and can be inaccurate (Monetary).

Most people don’t understand Economic growth or what takes place in the economy with regard to inflation, unemployment, or interest rates. These things are all regulated by the central bank called the Federal Reserve System. The tope covered in this paper is the monetary policy which is the policy that decides if unemployment, interest, and inflation decreases or increases. The Monetary policy decides what price a person pays for an item at the store, how much interest a person will get charged on a loan for a car. This is something most people consider, most just look for the best price point or look where their money can go the farthest.

In the last three months of 2008, under the general decline in the global stock market, numerous Asian stock markets were in free fall. The key stock index such as Nikkei 225 in Japan, Hangseng in Hongkong and Sensex in India suffered significant drops. (Rose & Spiegel, 2009)

Asymmetric information in lending is a huge risk. When there is misinformation from a lender to a borrower, this can cause a few different problems to arise; for example misinformation about job security or credit history from a borrower to a lender can result in late or missed payments, fraudulent spending of the money lent or the lending amount to be turned as bad debt. Specialization is a tool used for risk management. Specialization in lending helps reduce risk by gathering valuable and accurate information about the borrower. It

This article presents the fundamental reasons behind the Fed’s cautiousness in raising the interest rates, why it is more likely that interest rates will rise in December, and what some possible outcomes of rising interest rates could be.

In this case, Fed is unlikely to tight money supply by increasing federal funds rate, which is currently zero and is a frequently debatable topic. Such policy has a positive impact on a stock market.

Over the past year we have gone through many changes politically, environmentally, and more. The main change occurring today is the Federal Reserve’s control on monetary policy which affects the interest rates and money supply all caused by the buying or selling of government bonds. The Federal Reserve needs to raise interest rates because they have “remained relatively slow by historical standards” (Binyamin Appelbaum, July 7, 2017). However, the inflation rate and rate of growth in GDP have been relatively low, restraining the Fed from raising the rates too high.

51) Due to asymmetric information, the market fears that a firm issuing securities will do so when the stock is _________.

In other words, Monetary policy can be looked at as a policy that is money-based that involves banks that manage liquidity to create the growth of money. This includes the use of checks, cash, and credit that are used in the money market as primary ways of investing money. The most important of these is credit would be one of the most important tools used in the market because it consist of loans that are written promises to pay money back. Within every policy that every nation has there will always be an objective at hand. The U.S. Federal Reserve, like many other banks around the world, has clearly stated targets for their goals. They look for a certain percent of people who want to work but cannot find a job and the find that the rate of

How can monetary policy and fiscal policy greatly influence the US economy? Keynesian economics says, “A depressed economy is the result of inadequate spending .” According to Keynesian the government intervention can help a depressed economy through monetary policy and fiscal .The idea established by Keynes was that managing the economy is a government responsibility .

* Not only do borrowing and lending rates differ due to taxes and transaction costs, but some individuals are screened out of legitimate credit markets altogether due to informational asymmetries

If the firms funding requirements are larger than their retained earnings, they must issue debt as this is preferred to issuing equity. Based on this theory, a firm’s financing policies could be viewed as signalling management’s view of the firm’s stock value (Wang & Lin 2010).Myers and Majluf (1984) also add that if firms issued no new securities but only used its retained earning to support the investment opportunities, the information asymmetric could be resolved. This suggests that issuing equity turn out to be more expensive as asymmetric information insiders and outsiders increase. Large firms should then issue debt to avoid selling under priced securities. As the requirement for external financing increases, businesses will work down the pecking order, from safe to riskier debt, perhaps to convertible securities or preferred stock, and finally to equity as a last resort. Each firm's debt ratio therefore reflects its cumulative requirement for external financing (Myers 2001).The pecking order theory clarifies why the bulk of external financing comes from debt. It also describes why organizations that are more profitable borrow less: since their goal debt ratio is, low-in the pecking order they do not have a goal since profitable firms have more internal financing available.

Asymmetric information is the study of decision in transactions where one party gains more information than the other party. The theory of asymmetric information was first proposed in the 1970s and 1980s, it sometimes refers to as information failure and it is the contrast term to perfect information. Asymmetric information occurs whenever one party in an economic transaction appears to have greater knowledge than the other party engaged in the transaction. This normally explains itself when the seller (the first party) of a good or service possesses more information than the buyer (the second party), however, the opposite situation could be also possible like in the situation of financial market where the borrower (the second party) knows more information about his financial state than the lender (the first party). A good example of asymmetric information manifests in the situation of selling a car, in which the seller has the full knowledge of the car and its