Question 1) Forecasting Interest Rates based on Prevailing Conditions:
The decision to consider interest rates rise or decrease is dependednt upon following economic performances:
GDP Growth and Consumer/Business Sentiments:
US Economy is expecting rise in consumer confidence along with strength in business roles citing brightening overseas sales prospects. Current year saw a small increase in GDP of only 1.7% and with ending recession period in Euro Zone and rise in disposable income of US Consumers, economy is epected to sustain a rise in GDP number.
Increase in number of Jobs:
US Economy is still recovering from the nightmares of Financial Crisis and with efforts of Federal Government, economy is expected to reach a sustainable increase of 3%, thus generating more jobs and growth among trade partners.
Position of Federal Reserve:
Federal Reserve is approaching a phase out of $85 Billion-a-month bond buying programme. And as a result, the long term interest rates have already rise this year by about a percentage point putting a check on mortgage applications.
Cosnidering the present economic condition, interest for short term are likely to remin low in coming quarter as the policies of federal government are clear towards achieving a suatained economic pick up. However, for long term interest rates there is still high amount of volatility although a moderate rise is expected in response to rise in demand in housing sector and strong signs in gloabl economy.
Question 2) Impact of Stock Market Crashes on Interest Rates?
At times when massive selling of stocks by the individuals and institutions took place primarily because of the perception of stocks being overvalued, the interest rates in loanable funds market saw a major decline and the reason can be explained with the help of loanable funds throy:
The above diagram represents the loanable funds market where the interesection of demand and supply curves of funds leads to equilibrium interest rates. Now, with massive stock selling and with investors shifting out of stock market, the funds are now moved to money market by the investros which increase the supply of funds in the market and with the vertical axis representing spectrum interest rates both short and long term, as the supply of interest rates is increased, interest rates falls down and the same is represented here under:
Question 3) Impact of Expected Inflation?
With expectations of higher oil prices in coming future, the concerns for increase in inlfation will be on higher side. This is because, inflation can increase the interest rates and the same sentimenst will be seen in the behavior of US firms, governments etc whi may like to borrow more funds at present before interest rate and prices increase. Thus, becuase of these situations the demand for loanbale funds should increase, the supply of funds should decrease and as a result, the interest rates rises.
However, the impact of higher oil prices on other countries is not necessarily same. For Instance, Saudi Arabia produces its own oil and it can set the oil prices in its country. Thus, if the Saudi Government is able to prevent high prices in its country, the prices of oil derived products like gasoline, transportation will not be affected and thus interest rates will not be affected.
Question 4) Fed Watches:
In response to expected slow economic growth and rising unemployment and with the objective of Federal Government to ensure stable prices and sustainable economic growth, the US government is most likely to use the tools of Monetary Expansion to comabt the negative future aspects. Monetary policies are the economic tools where government/central bank targets interest rates and moneu supply for the purpose of ensuring economic stability.
Here, citing recessionary period in US Economy, the federal government will lower the interest rates and increase the money supply so as to promote a favourable environment for the businesses which will lead to job creations and finally, increasing the economic growth and sustained increase in disposable income of the individuals in the economy. However, all these measures shall be taken upto the point where economy do not reach the level of inflation .
Question 5) Functions of Federal Government?
Following are some basic functions of Federal Government:
1)To Establish Justice:
It is the responsibility of US government to protect the citizens who obye the federal law and punish those who did not
2) To form a perfect Union:
The nationa government performs the function of forming perfect union and in doing so will be fair across different state boundaries, helping the union in being together.
3)Provide Common Defense:
It is the responsibility of the federal government to protect the lives of its citizens and for doing so it should establish an army to protect the nation from external threat.
4)Ensuring domestic tranquility:
US government has the responsibility to ensure that all may lead a tranquil and quiet life.
5)To promote general welfare:
The fedral government is under the responsibility to promote the general welfare.
Question 6) Finance in the Money Market?
Financial market is a commonplace where both buyers and sellers meet and engage in trade of assets such as equities, bonds, currencies and othe financial instruments. The basic objective of every financial market is to faciliate transparent and fair mobility of capital from investors to the borrowers. Investors around the globe have access to wide range of financial markets with wide array of financial products. Following are the features of financial markets along with discussion on its respective roles:
Money market is that segment of financial market which are approached by the companies to borrow for short period of time ranging from days to one year only. The instruments traded in money market includes, certificate of deposits, US Treasury Bills etc. The major role of money market is to faciliate investors with high liquidity and safe horizon investments and similarly help the borrowers to procure funds at lower interest rates. Thus, because of these features, primarily short maturity investments, money markets investments are also called cash investments. However, just like other financial markets, money market indeed have some amount of risk associated with it in the form of default on securities like commercial papers.
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Parkin, M. (2011). US Inflation, Unemployment and Price Levels. In C. Institute, Economics (pp. 362-383). Boston: Custom.
Stevenson, A. (n.d.). Functions of the US Government. Retrieved December 12, 2013, from http://members.relia.net/thedane/cn_functions.html
Vanguard Research. (2013, December). Kiplinger's Economic Outlooks. Retrieved December 12, 2013, from Kiplinger: http://www.kiplinger.com/tool/business/T019-S000-kiplinger-s-economic-outlooks/