Finance Assignment Harvard Case Solution & Analysis

Answer Number1:

The decrease in interest rates may result in increased spending of the consumers because when the interest rates are falling or expected to fall it will enforce the consumers to increase their spending and take advantage of lower interest rates. The Treasury rates are the rates that are offered on the bonds of the government, many corporate bonds set the treasury rates as the benchmark and have derived their interest rates by Treasury bond rates after incorporating the risk.

The Fed can affect benchmark interest rates by increasing or decreasing the interest rates, in recent times Fed has reduced the benchmark Treasury rates to increase the spending and investment. The Treasury benchmark rates are considered to be the investment, in which the risk of default is almost zero, whereas investments other than this have a risk of default of the borrower. If the Treasury yields increase, it will also increase the rates of other investments and if the Treasury rates decrease the rates of other bonds will also decrease.

Answer Number 2:

In many circumstances, the Fed’s maximum employment goal conflicts with its price stability goal. Price constancy habitually conflicts with the interest rate’s uniformity and high employment in the short term but not in the medium or long term. At the time of mounting of the economy, the unemployment will start to decline, and the interest and inflation rates are subject to increase. It may result in overheat of theeconomy. However, if Fed raises the interest rates to prevent inflation, the unemployment may rise in the short term.

Answer Number 3:

Aggregate demand is the total demand for goods and services in the microenvironment of the country. Aggregate demand is usually used in assessing the performance of the economic environment of the country,while theMonetaryPolicy is concerned with the supply of money in the market which has an impact on inflation rates, employment rates, and interest rates.

Monetary Policy has a direct influence on the aggregate demand; it will result in the corresponding decrease in the total demand. If the money supply in the economy is increased in the economy, it will enhance the spending of consumers which will result in the growthof aggregate demand.

Finance Assignment Harvard Case Solution & Analysis

Answer Number 4:

Disinflation:

Disinflation is often confused with deflation. In deflation the prices of goods and services decreasewhile disinflation is areduction in the rate of inflation. In disinflation the inflation grows in the economic activity, but the pace of growthis reduced.

Impact on Aggregate Demand and Supply and Unemployment:

Disinflation is caused by two main factors which are areduction in the supply of money and recession. In a downturn, the total demand increases as compared to the decline in thegrowthoftotal supply. This relationship will result in adecrease in the prices which ultimately diminishes the profits. As a result of reduced earnings, the unemployment level grows. Eventually, all the people adjust their level of inflation expectations which will turn around the performance of theeconomicactivity and the employment level will move to its original rate.

Answer Number 5:

Taylor Rule:

Taylor rule provides detail guidelines on how the Fed or state banks should adjust the interest rates when the circumstances of economic conditions are changing. According to Taylor rule, the Fed should increase the interest when the unemployment rates and inflation are high and when the inflation and unemployment level is low Fed should reduce the interest rates......................

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