Tutor profile: Tina L.
You have just been appointed the new Federal Reserve Chairman, congratulations! What four monetary issues will you address and what will your actions be?
The Federal Reserve or the Federal Reserve System is the central banking system of the USA. Federal Open Market Committee is a part of it that decides monetary policy. The committee includes the 7 members that comprise the board of governors and five reserve bank presidents. The FOMC meets eight times in a year to decide on key issues like interest rates, and the level of money supply required for the economy to sustain its long-term growth. The monetary policy is therefore, the responsibility of the FED. In The Federal Reserve Act of 1977 clearly stated the objectives of the monetary policy objectives: "The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates." This is referred to as the ‘dual’ mandate, where unemployment and inflation are of concern to the FED. With this back ground 4 important monetary issues are: • Inflation rate- Despite a rise in money supply, inflation is under control in USA. it stands at 2% for the last 12 months, which is the inflation target set by FED. Technically a rising money supply can cause inflation if demand exceeds supply; but recent data shows that prices are well within control. "Aside from the spike in gasoline prices, which is already being reversed, it is hard to find any evidence of major price pressures," according to Paul Dales, senior economist for Capital Economics. • Unemployment rate: This remains a problem area for policy makers as it stubbornly remains at 8% despite massive fiscal and monetary infusions in the economy. While this is lower than the historic rate of more than 9% that USA saw in the recession of 2009, it has not come down in large amounts. A part of the reason can be the non-productive nature of fiscal expenditures and the existence of structural unemployment. Whatever be the cause monetary policy agenda holds a reduction in unemployment rate as a prime concern. Easy money supply is expected to fuel new investments that generate jobs. such a policy is also a signal for an improvement in business and consumer sentiment. • Rate of interest –Since 2008 FED has maintained low interest rates in the hope that low cost of funds will encourage investments, that contribute to rising GDP. While this has not had the desired effect on investments levels that remain sluggish, there are risks to low interest rates in terms of future expectations. • Asset purchases. FED has indulged in unconventional measures like QE. Quantitative easing is an expansionary monetary policy. It allows the central bank to print more money, which is used to buy treasury securities from the market. This causes a rise in demand for these securities, reducing the rates of return on them as well increasing the liquidity in the system. Lower rates are good for investments and are expected to boost investment demand, and therefore aggregate demand. The money generates from QE was used to fund a fiscal expansion in the economy as part of the efforts to boost effective demand by giving more money in the hands of people to spend and easier and cheaper credit for investment purposes. Greater liquidity is theoretically expected to raise effective demand and raise GDP in the process.
Mary starts out with $100. She invests the $100 in a bank account that earns 4% per year. How much will the $100 grow to in one year?
The $100 is referred to as the present value of the investment. We are trying to calculate the future value of the investment after one year. Put in $100; figure out one year's interest = .04 * 100 = $4; add the $4 to $100 and the amount $100 will grow to in one year is $104. So, the future value of $100 in one year is $104. Here's an alternative, more efficient, way to calculate the answer. Multiply the $100 times (1 + the interest rate) to arrive at the future value. $100(1+.04) = $104. Using mathematical symbols, we are saying FV =PV(1+r) ; in words, take the present value times (1+the interest rate) to get the future value.
During the first year of operations, X Corporation entered into the following transactions relating to shareholder's equity. The articles of incorporation authorized the issue of 8 million common shares, $1 par per share, and 1 million preferred shares, $50 par per share. Prepare the appropriate journal entries to record each transaction. 1. Sold 2 million common shares for $9 per share
1. Cash 18,000,000 Common Stock 2,000,000 Paid in capital - excess of par 16,000,000 X Corporation sold 2 million common shares for $9 per share, so the total $ amount sold is 2 million x $9, which equals 18,000,000. You would debit this amount to the Cash account because it is the amount X Corporation receives by selling the 2 million common shares. Next, you would need to credit the Common Stock account. When shares are sold for cash, the capital stock account is credited for the amount representing stated capital. When shares have a designated par value (for example: the common shares have $1 par value per share and the preferred shares have $40 par value per share), the amount denotes stated capital and is credited to the stock account. Proceeds in excess of this amount are credited to Paid in Capital - excess of par. So, the credit to Common Stock account amount is the number of shares sold x the par value of those shares. In this case, it is 2 million common shares x $1 par per share = 2,000,000. We would then credit Paid in Capital - excess of par. The amount is the difference between cash and common stock (18 mil - 2 mil = 16 mil).
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