3. The Federal Reserve Board has 3 basic tools, while the federal government has

Question

3. The Federal Reserve Board has 3 basic tools, while the federal government has 2 tools to help to stabilize the economy. If the Fed and government thought that the economy were growing too slowly or showing signs of higher than desired inflation, they would act in concert. a) If there are signs of weakening demand, would the Fed buy securities from or sell securities to banks and businesses. b) Briefly explain how those actions would impact the economy in terms of money supply, commercial bank reserves, interest rates, components of Aggregate Expenditures, GDP, employment and incomes in the short-run. This is the spiral. c) What are some fiscal steps that the government could take in order to lessen the impact of recession? d) Why are federal deficits a concern for the larger economy in the long term? 4. Chapter 16 discusses the Financial Markets. a) Describe the differences between the financial instruments, stocks and bonds. b) How much is the market price of a $1,000 bond with a coupon payment of $60 per year that matures in one year when the prevailing interest rate is 4%? c) How much is would you be willing to pay now for a share of stock whose market price in one year is expected to be $60 per share and whose dividend is expected to be $5 if your required rate of return is 10%? 5. Dave's Mirror Company expects to sell $1,000,000 worth of mirrors and to produce $950,000 worth of mirrors in the coming year. The company purchases $200,000 of new equipment during the year Sales for the year turn out to be $1,200,000. a) How much is total actual investment by Dave's Mirror Company? b) How much was total planned investment? c) Explain what implications this has for future employment if Dave is indicative of the larger economy?

Explanation / Answer

Inflation refers to general rise in price of goods and services which in turn leads to dissatisfaction among the people of the country as nobody likes to pay more money for goods and services. Inflation is a double edged sword if used judiciously it can put country to the path of prosperity and if it goes out of control then it can lead to chaos and disaster for the country. Given below are the advantages and disadvantages of inflation

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