Finance task Harvard Case Solution & Analysis

Finance task Case Study Solution

It can be determined that an amendment in the balanced budget of the U.S. Constitution would potentially have significant adverse impact on weak economies and push them towards recession and would be un beneficial for the nation’s long-term fiscal policy. Furthermore, it could cause significant harm to the economy, creating huge challenges for operating social security and other primary federal functions. However, the serious problems caused by the amendment in the balanced budget includes;increase in the risk of pushing weak economies into recession which are long and deep and attribute towards destabilizing the country. Moreover, it would also result in loss of jobs, which would compel the policymakers to cut spending, which, in turn, would increase the tax rates including interest rates attributed to the weak economies facing recession. Therefore, the economy slumps and the federal revenue would decrease, in terms of growth rates, after which the spending in social programs including unemployment insurance, which in turn would increase the deficits. Hence, instead of stabilizing with lower tax collection and increased unemployment to off-set the effects of weak economy, the policymakers are compelled to reduce spending and increase taxes, which would adversely affect the economy and would lead to an increase in the deficits, which in turn would compel them to repeat the same procedure, which would further destabilize the economy.

Question: 2

There are two possible scenarios that could cause the saving outside U.S to shrink, whereas the investors in the United States market are not considering saving money outside the country and investing heavily within the country. This, as a result, would compel the policymakers to increase their spending and reduce taxes (including interest rates), gaining higher return from additional investment.

Secondly, the other scenario is that the investors had lost confidence in the U.S markets, attributed to the low return, which was gained from the markets. This, as a result, would decrease the overall purchasing power parity and income of the investors., which had compromised their ability to save money outside the United States. Moreover, it can be assessed that this economic downturn in the market could be attributed towards the interest rates.

Question: 3

It can be determined that only primary market deal with resources, as they deal in the trade of newly issued securities, whereas, the secondary markets only deal in the trade of those securities, which has previously been issued. Furthermore, it can be assessed that the money market instruments have maturities pertaining to a year or less, whereas, the capital market instruments have maturities pertaining to those securities that were previously issued and have not been transferred from surplus to deficit units. On the other hand, they also deal with newly issued securities that have been transferred from surplus to deficit units.

Question: 4

When one party has better information over the other, while making important decisions, it is known as Asymmetric Information. However, Asymmetric information creates an imbalance of power between the investors available in the market.

A situation in which the investing party takes risks attributed to the cost, which would be incurred in case of loss, would not be felt by the investing party. This is known as Moral hazard, which is a result of Asymmetric information, also creating an imbalance of power between the investors, in which a party has certain information that would save them from the risk causing losses, which would be dealt by the party with minimal information regarding the risks.

A process in which sellers and buyers have access to imperfect or different information often tends to shift the quantity and price of products in the market, attributed to their uneven knowledge. This is known as adverse selection. The imbalance of power is created by the asymmetric information gathered by the buyers and sellers.

Finance task Harvard Case Solution & Analysis


Question: 5

The loss on an asset of a commercial bank and its impact on its shareholder depend on two factors in which its impact depends on the relative size of the asset. On the other hand, if the size of the asset is significant and accounts for major portion of the commercial bank, then the news could have adverse impact on the market, which would potentially decrease the net worth of the shareholders invested with the bank. Whereas, if the size of the asset is insignificant and accounts for minor portion of the bank then, that would have no relative impact on the shareholders’ net worth.....................

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