1) Suppose the CFO of a German corporation with surplus cash flow has 1 million Euros to invest. Suppose that interest rates on 1-year CD deposits in US banks are 2%, while rates on 1year CD deposits denominated in euros in German banks are currently 4.5%. Suppose further that the CFO expects that the (euro/$) exchange rate will increase from 1euro per $ to 1.1 euros per $ during the coming year. Should the CFO invest in CD's denominated in dollars or in euros? Show your work of estimation to substantiate your response as credible! 5 pts.
Hint: Keep in mind that this investor is a German and to invest in US banks, he/she needs to convert into US$ from Euro during the time of investment and convert the total return and principal amount back to Euro when the CD after a year at the predicted exchange rate mentioned in the statement. If she/he invests in a German bank, no need to convert Euro and the rate of return would still be 4.5%. So, the decision of investment between the alternatives would depend on the difference in rate of return from US investment and 4.5% (from guaranteed investment in a German Bank). If your estimated rate of return from US Bank is greater than 4.5%, you invest in US. Otherwise, she/he would investment in a German CD.
2) Explain why the Fed must normally add reserves to the banking system via open market operations on most days in order to maintain its interest rate target in the Fed Funds market. You refer to its current reduction in the federal fund rate cut to 0.25% that I have discussed in my class notes and weekly HW questions. 5 pts.
3) Visit the home page of the Federal Reserve Systems of the central bank of US at www.federalreserve.gov and read the key objectives of the Fed to stabilize the macroeconomic crises of the US economy (you have to look for the links from the home page of the Fed's website- click on the tab "About the Fed" and read through the contents). Based on the information on monetary policy objectives and tools, answer the following question 3A.
For: Policy objectives/purpose: The specific URL under the tab about the Fed (Item2): https://www.federalreserve.gov/pf/pf.htm
For Policy tools: The specific URL under the tab Monetary Policy is (the listed thread is policy tools): https://www.federalreserve.gov/monetarypolicy/default.htm
Under that tab, find the link for Mission from the menu bar
You may also find them in the required textbook for this class.
3A) What are the key objectives and what are the conventional monetary policy tools the Fed uses to achieve those objectives? 5 pts.
Then you read the speech given by former Fed's Chairman Bernanke on Oct 11, 2011 at the Federal reserve Bank of Boston at this url link https://www.federalreserve.gov/newsevents/speech/bernanke20111018a.htm of the Fed's website to answer the following question 3B. This speech was a landmark event to departing from conventional monetary policy measures by adapting a new measure called Quantitative Easing (Selling the Treasury Bond Assets and Mortgage backed Securities) to boost the housing market as the key strategy to faster economic recovery. That QE is finally going to end this month of November 2014. The question in 3b is related to the ending of QE.
3B) On October 29, 2014, the members of the Federal Open Market Committee (FOMC) of the Federal Reserve Board voted to maintain its federal fund target within the same
range of 0.25% basis points and 0% percent, as it was set by the FOMC back in August
2011. But in 2011, the economy was in severe recession and the purpose was to boost the economy by increasing liquidity in the banking system at this low rate when the inflation was also very low. The specific action of the Fed trade was to purchase treasury securities every day to increase the money supply and thus keep the interest rate (the federal fund rate) low to stimulate the economy.
But in October 2014, the economy has shown to its near full recovery and stock market and financial institutions are performing very well since 2011. On October 29, 2014, the FOMC also decided to end the asset purchase plans under Quantitative Easing (QE III) under which the Fed had been buying mortgage backed securities and LT Treasury Bonds since the recovery started in 2011. Upon this decision to end the QE III of asset purchase and keeping the same federal fund rate target, the Dow Jones Industrial Average Price gone down significantly and did not fully recover by the end of the trading day.
Question: What are the macroeconomic trends that did prompt the FOMC to end the QE III but to keep the federal fund rate still at its historic low? You need to give reasons for both of these policy measures.
For more information, please visit the press release of FRB in the url link here.
https://www.federalreserve.gov/newsevents/press/monetary/20141029a.htm
Also, read some newswire analysis here on cnn portal on the same day.
https://money.cnn.com/2014/10/29/news/economy/federal-reserve-ends-qe-bond-buying/index.html?iid=HP_LN
4) In the first quarter of 2009, President Obama pushed his massive fiscal stimulus package of $862 (It was originally at $787 billion) through the Congress and later passed by the House and the Senate, whose centerpiece was spending most of this stimulus funds in repairing and building infrastructure in transportation, healthcare, science and technology, and education. Pres. Obama also urged to make a modest tax cut for middle-income families making a household income less than $250K per year (it has been modified to $400k starting from January 2013). The push for this combined package of spending and partial tax cut was also criticized by several opponents in politics, academia, and businesses on the ground that the spending was too large under government financing to balance the growing budget deficit and national debt that might threaten future economic stability of the country.
4) A) What possible macroeconomic arguments might President Obama use to defend his $862 billion fiscal stimulus package as a part of his economic recovery plans? 5 pts.
B) What were the macroeconomic arguments the critics might have expressed in their opposition to stimulus package as a bad economic policy, and not just for the US, but also for the world economy? Do they sound to have a trickle down adverse effect in the current or future financial stability in the US and the World economy, say later in 2013 and beyond? Do you think this issue is also related to the current political rhetoric between the GOP and Democrats on raising the tax rates for the wealthy making over $250K annually and leave the Bush Tax cut for the middle class (expired on Dec 31, 2012, with modification of extending the tax cut up to $400K per household)? With the new fiscal bill of President Obama passed by the US Congress on Jan 2nd of 2013, how would it affect the economy in the next two years starting from Jan 2013? 5 pts.
C) What would happen to the growth rate of the money supply if foreigners lost confidence in the US dollar as a result of current uncertainty over the crisis of the fiscal cliff in the US economy while the Fed was trying nonetheless to maintain its current historic low federal funds rate target? Explain briefly. 5 pts.
Hint: Please keep in mind that the question asked whether money supply growth rate will increase or not (by the Fed) and why so.
d) Using the Keynesian Cross model diagram (The diagram with 45 degree line by splitting AD (C+I+G+NX) on the vertical axis and RGDP on the horizontal axis, See in Ch. 9,10 & 13 of the textbook) and equation, critically and briefly illustrate the short run and long run economic impact (negative effect on RGDP growth, employment, and other variables) of Recent "Sequester" measure of $85 billion (automatic spending cut of Government spending, G) passed by the US Congress.
(Hint: The impact will be in terms of major macroeconomic variables of US economy such as GDP growth, unemployment rate, interest rates, and inflation). 3 pts.
However, many critics contended that this "sequester" measure is only temporary and too small given the $4T US government budget to have a significant impact on the economy. Therefore, many economists considered this spending cut as too small to bring the economy back into recession. Do you agree or disagree with this contention?
Hint: You may also observe he most recent economic trend and the stock prices in the Wall Street, especially during the end of the second quarter of 2013. 2 pts.
Also, as part of your answer, you may include all pros and cons you might think in supporting your answer. You may also give a reference to the then economic trends in the context of consumer confidence, political bickering on the issue of debt ceiling, and government shut-down, unemployment rate and job creation for Aug and Sep 2013, stock market volatility, Housing market rebound, etc.