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    Bec Sample

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    SambasivaBharat

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    © All Rights Reserved
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    Bec Sample

    Uploaded by

    SambasivaBharat
    6 views6 pages

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    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    6 views6 pages

    Bec Sample

    Uploaded by

    SambasivaBharat

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    You are on page 1of 6

    INTEREST RATES

    Interest rates are the cost of borrowing money.

    A lender must analyze the creditworthiness of the borrower and the borrower’s industry.

    A lender would analyze:


    1. Credit or Default Risk – risk firm may default on loan
    2. Interest Rate Risk – risk that interest rates may rise and value of loan will fall
    3. Market Risk – risk that industry or broad economy slumps

    TYPES OF RATES

    Discount Rate – the rate that the bank pays to borrow funds

    Prime Rate – the rate banks charge their top customers

    Real Interest Rate – Interest Rate minus the Inflation Rate

    Risk Free Rate – the interest rate without credit risk – U.S. Treasuries are most commonly used

    MONETARY POLICY
    Tools used to influence monetary policy:

    • Open Market (most valuable) – FED buys gov’t securities which lowers interest rates

    • Required Reserve Ratio (RRR) – change the level of reserves banks must hold, lower
    reserve requirements results in more money to lend

    • Discount Rate – lowering discount rate encourages bank to borrow more


    The Federal Reserve may choose to tighten or loosen monetary policy depending on
    economic conditions:

    Loosen Money
    • recession coming
    • FED buys government securities which puts more money into
    circulation
    • lower required reserve ratio (more money to lend
    • Lower interest rates
    Tighten Money
    • Inflation coming
    • Sell government securities
    • Increase required reserve ration
    • raise interest rates

    MONEY SUPPLY

    Money supply consists of M1 + M2

    M1-currency (paper money & coins), checking accounts

    M2- Savings accounts (including money markets), small time deposits (less than 100K), non-
    checking savings, mutual funds

    Excess Reserves and the Money Multiplier


    A single bank can lend their excess reserves. An entire banking system can lend their excess
    reserves X money multiplier.

    Money Multiplier:
    1 ÷ Reserve ratio
    TRADE BARRIERS

    Tariffs
    • Taxes imposed on imported goods (protect domestic producers and discourage foreign
    consumption).
    • Results in higher prices for imported goods.

    Import quotas
    • Set fixed limits on different products (domestic employment and prices ↑).
    • Balance of payment ↑ in short run

    Embargos
    • total ban of imports (extreme)

    Voluntary exports
    • reduce products available in foreign county (used to avoid official sanctions)
    • Trigger price-tariff on unfairly cheap imports
    • Prices are driven ↑ for both import quotas & tariffs

    Arguments in Favor of Protectionism


    • Reduced imports protects against domestic jobs
    • Industries essential to national security
    • Infant industries need protection in the early stages of development

    Economic Cost of Protectionism


    • Real wages and world output declines
    • Workers are shifted from efficient export industries into less efficient protected
    industries

    Domestic content rules


    • Requires that a portion be made domestically.
    • usually applies to capital intensive industries – eg cars

    Dumping
    • charge an artificially low price to drive out competition
    • lower than its home market
    • less than the cost to make it

    CURRENCY EXCHANGE RATES

    There are three main types of exchange rate policies:

    Fixed: currency is fixed or allowed to fluctuate in a narrow range.

    High degree government


    of can
    predictability manipulate
    the value of
    the currency
    Freely Floating - determined by market forces of supply and demand

    automatically Makes country


    correct any vulnerable to
    disequilibrium in economic
    the balance of conditions in
    payments (BOP) other countries

    Managed Float (used by major trading nations) - government allows market forces to
    determine rate until they move too far in one direction. The government will intervene at that
    point.

    best of both vulnerable to


    worlds (allows exchange rate
    free floating with changes and lack
    the option of self correcting
    govt. mechanism of
    intervention) free floating

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