The Financial Market in Bangladesh an Overview of Capital Market.Doc

One economic policy was that “the Federal Reserve had raised interest rates in hopes of slowing the rapid rise in stock prices” (Romer, 3). At the time the “stock prices had risen more than fourfold from the low of 1920”

The Federal Reserve has the dual job of ensuring price stability and maximum employment, which are contradictory objectives. The Feds try to achieve the goals through monetary policy which determines the demand and supply of money by controlling interest rates. The Fed’s goal is to achieve a natural rate of unemployment of more or less 5%. When the actual unemployment figures are below the natural rate of unemployment, inflation increases and there is a high demand of goods and services propelling the economy with the ensuing labor demands and the pressure it places on wages, which in turn produces inflation. When the Fed is faced with this scenario, it must increase the rates to slow the growth and achieve price stability (contractionary cycle).

By law, the Federal Reserve conducts monetary policy to achieve its macroeconomic objectives of stable prices and maximum employment. The Federal Open Market Committee usually conducts policy by adjusting the level of short-term interest rates in response to changes in the outlook of the economy. Since 2008, the FOMC has also used large-scale purchases of Treasury securities and securities that were guaranteed or issued by federal agencies as a policy tool in an effort to lower longer-term interest rates and thereby improve financial conditions and so support the economic recovery (What).

Keeping interest rates artificially low in the 1920s, raised interest rates in 1929 to halt the resulting boom. At that time it was too risky to invest in stocks because they would fall in heavy debt. Factories couldn’t get any loans from banks because they didn't have any money to give, which meant they couldn't make any products and had to lay off works to save money.

The Federal Reserve exercises its power to stimulate stable employment economies and economic prices. The pursuit of the required employment rate and the creation of price stability, the Federal Reserve can increase or decrease the interest rate.

To begin, the article explains the Federal Reserve’s plan to take a careful approach to enacting contractionary monetary policies, policies used to decrease money supply, in the future. Last December the Federal Reserve raised the interest rates after they had been near zero for years to ensure inflation was kept in check and to promote economic growth. It appeared the economy would be in for another increase in the interest rates sometime this year, but the Feds have rethought that strategy. If the Federal Reserve were to continue to raise interest rates it would have short-run and long-run effects on the Money Market, Goods and Services Market, Planned Investment, Phillip Curve, and Aggregated Supply and Demand. These effects are aspects that have to be considered because they express and explain the effects the increase in interest rates has on the economy and explain if the Federal Reserve is enacting the correct policy to achieve their goal.

The Federal Reserve (FED), is the central bank of the United States. It was created by Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system (Federalreserve.org, 2016). The monetary policy of the US is governed by the FED, which assist in regulating the supply and demand of money in the market. Interest rates are a very important tool of monetary policy that economists use to achieve the targets defined for the country’s monetary policy. Interest rates have a profound impact on the value of the country’s currency, inflation, export competiveness and imports into the country. Interest rates also impact the inflow and outflow of funds into or out of the country. Due to their wide reaching impact on the economy, if the Fed decides to raise the interest rates at the end of this year it will definitely impact several aspects such as consumer financing, annuities values, the NPV calculation, the WACC and corporate earnings.

Economic wise, in the 1920's, demand for consumer goods and new products such as radios, electrical appliances, and automobiles led to increased production and business profits. Many of these goods were purchased using installment contracts, by which goods are purchased on credit and ownership is transferred after the last payment is made. The increasing share prices caused people to buy shares in hope of making large profits. In 1928 and 1929, the Federal Reserve System raised interest rates in an effort to slow stock market predictions. Bank failures occurred because of the stock market strained their financial resources. Banks had also loaned money to many farmers and businesses who were unable to repay it. Bank profits declined, and bank

With more people investing in the stock market, more buying stocks “on margin” took place, which meant more money was lent out. Many businesses and banks decided to invest in the stock market also, but the problem was that banks were using their customer’s money, without the customers being aware of this, to invest in the stock market.

The interest-rate effect explains that when the price level decreases, consumers have more money left over after consumption (because prices have dropped) which they can then place in financial intermediaries (banks) who can in turn loan those funds out. An increase in the supply of

would this event cause Investment to fall in the present? Illustrate your answer on the world S-I graph,

The Federal Reserve monetary policy exists to accomplish the goals of their dual mandate, maximizing employment and keeping prices stable. To accomplish these goals, monetary policy either changes the interest rate, namely the federal funds rate, or the money supply. Before carrying out these policies, the Fed considers economic data such as the trends in the CPI which describes the average level of inflation and various trends in the labor market . Through monetary policy, the Fed is also responsible for fighting recession. To do so, the Fed decreases interest rates but only to a certain point because nominal interest rates cannot go below zero. Therefore, it is important that the Fed return the federal funds rate back to its neutral rate before the next recession begins .

Although lower interest rates can improve domestic spending, it will discourage foreign investors because the return on their investments decreases. As of September 2011, the US interest rate is close to 0% and Canada’s rate is at 1% as determined by the Bank of Canada. Low interest rates indicate that the US is in poor financial health. More countries will want to invest in Canada if the US is in a risky financial situation and additionally, provides low returns. The value of the Canadian dollar rises when demand increases.

Along with the other problems that America has is that interest rates are steadily rising. When interest rates rise, not only affects consumers, affecting private sector and the government. He called the number of problems that can only be corrected by reducing interest rates. However, these problems affect these different infrastructures differently.

A: Investment spending depends on interest rates due to opportunity cost and risk. For example, when interest rates rise, the opportunity cost of your investment also increases. When interest rates are higher investors are willing to pay less for payment in the future. Which in turn leads to a lower rate of investment. The opposite can be said for falls in interest rates that are met will lower opportunity costs.