Essay Example on Keynesian theory the increase in investment Level

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Final Exam 21  year later GBP USD 1 55 Interest Rate in England 2 100 000 000 1 68 168 000 000 year return 168 000 000 1 02 171360000 USD conversion after 1 year 171360000 1 55 110554838 71 Return on Investment 110554838 71 100 000 000 1 1055 1 1055 1 100 10 55 Return on investment is 10 55 B CFO must have expected GBP to appreciate as there is a difference in interest rates Interest rate parity states that the difference in interest rates will be equal to forward and spot exchange rate 1 02 1 005 1 01492 This turns out to be 1 5 roughly Now we should plus this into exchange rate differential 1 68 1 01492 1 6553 Expected GBP USD rate was 1 6553 3 The time referenced above the 2008 financial crisis situation is a phase of financial crisis where the situation of depression took over the economy so that business runs into a complete downfall Within this time period the economy faces all the depression related factors such as low income level high unemployment high inflation level low savings and so low investment level etc Periodically it is needed to increase the money funding in result to increase the investment in the economy 



This is because according to the Keynesian theory the increase in investment level will increase the national income and the rate of employment in order to increase the aggregate demand to draw a trajectory of pulling the economy out of this depressionary situation The traditional open market operation of purchasing the Treasury bills is a slow process where the money supply in the economy increases in a stepwise manner But the time we are looking into and analyzing needed a much rapid expansion of money supply and so the Fed decided to go out of their comfort zone from 2008 2009 to adopt the expansionary direct lending policy to increase the fund needed to expand the investment in the economy In doing so led the aggregate demand to rise and helps pulling the economy out of the dangerous situation 4 Banks are being flooded with deposits due to various measures that were taken On the surface two repercussions appear to be evidently present one is that it may be a signal that despite all the actions the Fed has been unable to raise the demand for liquidity and the second is the increase in the deposit may fuel inflation Although the repercussions are a probability that may take place there are some other aspects that need to be need to be considered 



As a consequence of increased deposits with the banks the lenders may want to decrease the rate of interest which effectively is releasing more money into the system and into the hands of the general public This in turn raises the buying power of the individual increasing the demand for goods and services In case the produce of goods and services are short of the demand this may give rise to inflationary pressures A clear and well thought out strategy here shall be the catalyst for other aspects of the economy as well like employment levels etc 5 Given the current condition of the US economy we believe that the US policy makers would prefer to see the USD to decline in value A strong dollar makes US goods expensive so that net exports fall which implies trade deficit and worsening of balance of payment When the US dollar makes domestic producers losing money in reduced exports domestic firms might locate themselves out in other nations so there will be a job loss as well In terms of AD AS this implies a reduction in net exports and so AD shifts left reducing price and RGDP A weak dollar makes US goods cheaper so that net exports rise which implies trade surplus and improvement in balance of payment When the US dollar makes domestic producers earning more money by increasing exports domestic firms might expand while for domestic consumers a weak USD implies expensive foreign goods in terms of imports In terms of AD AS this implies a rise in net exports and so AD shifts right increasing price and RGDP 6 1 year US treasury securities yield 0 28 2 year US treasury securities yield 0 69 Expectations of 1 year yields 1 year from now is calculation below using expectation theory 1 year yields 1 year from now 1 0 69 2 1 0 028 1 1 013847 1 0028 1 1 10


Hence Expectations of 1 year yields 1 year from now is 1 10 7 A Balanced Budget Amendment is highly ill advised to address the nation s long term fiscal problems 

The argument against is that it would cause economic harm and raise a host of problems for social security and other federal vital functions which would result in some serious risks rising such as capping weak economies into recession and making it longer and deeper Instead of allowing the automatic stabilizers like low tax collection and other benefits to cushion an economy the amendment would force policyholders to reduce spending and increase tax or both This will weaken the economy and would lead to higher deficits B Not all deficit budgets are bad in fact recent deficits accelerated recovery from the recession but long term deficits of the present magnitude are harmful This would increase indebtedness to foreigners which is risky and expensive Today the United States is the second largest net debtor in the world If foreigners lose confidence their investment in the country would diminish bringing down the value of dollars and raise the prices for imported goods Ultimately this could increase interest rates and also lead to a further financial crisis


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