The Economics of Money, Banking, and Financial Markets - Assignment Example

Name: Professor: Course: Date of submission: Question one a. One of the variable factors of production in the Coca cola Company is labor. Labor, as a variable factor in Coca cola production activities, offers additional input that the company requires in the expansion of short-run production.  The Coca cola Company has embraced the “UN Guiding Principles on Business and Human Rights” that offers guidelines on how people relate with one another. Fixed factors of production in Coca cola Company, such as capital, provide the capacity constraint in the production process. As more quantities of variable factors of production within the firm, like labor, are significantly added to the fixed factors of production, such as capital, the variable factors of production become less productive (Melvin 180-187). b. It is referred to as the reduction of the long-run average as well as the marginal costs that arise from an increased size of the operating units (the factories or plants, for instance). Economics of scale might be interior to a business (cost reduction as a result of technical and management aspects) or outside (cost reduction as a result of the impact of technology within the industries). Application In bulk buying: Supermarket buys foodstuff in bulk and gets considerably lower average costs as opposed to buying in lesser quantities. Marketing economies: Spending £200 on the national television advert promotion is only sensible for multinational firms like Starbucks or Coca Cola. When one’s output is less, the average cost of the advertisement is significantly high. Financial economies: The big companies get lower interest rates on borrowing Container Principle: the transportation of larger quantity of commodities results to a lesser average cost. Specialization: the car production stages are intricate ad require specialization of workers. Specialization necessitates less training of employees and a considerably effective production method. In regard to the long run, there is no fixed input. Per se, marginal returns, particularly the law of diminishing marginal returns doesn’t apply and doesn’t offer affect production as well as costs. On the other hand, long-run average costs are impacted by the increase and decrease returns to scale, which interprets to the economies of scale as well as the diseconomies of scale. Question 2 What is money? It is referred to as the items or certifiable records that are usually acceptable as means of payment for commodities and services and in repaying debts within a specific nation or socio-economic perspective. The major purposes of money are: a medium of exchange; a unit of account; a store of value; and, sometimes, a standard of deferred payment. An item or certifiable record that satisfies the above purposes can be taken as money (Mishkin 6-9). The central bank, within a country, is mandated by the government to tightly retain control over a country’s money supply. The central bank, while regulating the supply of national money, uses the following techniques: Open market operation: This is the most common technique in the monetary policy. This is the behavior of country’s central bank while trading or purchasing government securities for cash as an attempt of expanding or contracting the monetary supply. Though the purchases of the government securities expands the overall monetary base, the sale of the government securities eventually contracts a country’s monetary base (Mishkin 6-9). The discount rate: A country’s central bank is also mandated to supply commercial banks with adequate currency that will meet the demands of the consumers. By regulating the country’s interest rates, the central banks are able to meet and also offer directive on the consumer’s monetary demands. A decreased interest rates results to an increased consumer’s monetary demands; an increased interest rate lessens its demand. The dynamics of the interest rates similarly, have a significant effect in the setting of the level of the prices. An increased monetary demand results to increased spending intensity and brings about increase in prices. A decreased monetary demand slows the spending level and produces a successive decrement of prices. When consumers anticipate for the fall of price levels, the monetary demands are likely to rise. When consumers anticipate for rise in price levels, the monetary demands eventually decrease. Reserve requirements: The countries’ central banks have the responsibility to hold a particular fraction of the aggregate deposit as cash or on the accounts with the central banks under the fractional reserve banking. A central bank might change the aggregate monetary supply by altering the required percentages of the overall deposits that are to be held by the country’s commercial banks. Any increment in reserve requirements might lower the monetary base; decreased requirements are likely to raise the monetary base. Question 3 Spending the way out of recession The government can focus on various aspects. Addressing unemployment issues The government can devise various ways of reducing long-term interest rates within the financial institutions. Such programs would be set in a way that makes the process through which the youths and businesses easily borrow money from financial institutions cheaply. However, there might arise credit crunch within the financiers. This incident might arise if there is likelihood of declining value of the collaterals used by the financiers in securing their loans. Also, exogenous changes within the monetary sector (for instance, if the central banks unexpectedly and without prior notice raise reserve requirements or impose new guiding restrictions on money lending). Credit crunch might also arise should the central government impose direct credit control on the lending sector. An increase in the opinion regarding the risk about solvency of different commercial banks in the banking sector is another negative impact (Rayman 205). Money for Mortgages During the course of a country’s recession, the government should actively attempt to revive the wavering economy. For instance, the government can start buying a substantial amount of mortgage. The money might be used in the purchase of mortgage debts and governmental bonds, a step that would be meant for the stimulation of expenditure, lower long-term interest rates and revive the stock market. However, a slight go-slow within the market, might render a negative impact on the prices and the value of the pre-sold condominiums. In case by completion dates the value reduces by 5-10 percent, the consumers are compelled to spend more cash as their down payments. The method that the banks use while lending on their properties is a percentage of the marketplace value and/ or acquisitions price, either is lower (Rayman 205). Lending for Banks During the recession periods, the government can come up with strategies that provide lines of credit to the monetary and lending companies. This monetary infusion would provide money for clients’ loans and resultant consumer business - the fundamental driving force of a country’s economy. However, a prolonged reckless and unsuitable lending might result to bad debts. This would eventually result to losses for the lending organizations and financiers. The thoughtless lending has high likelihood of occurring within uneven, competitive credit market, whereby the financiers might have competition with one another for market-share and revenue by lessening the lending criteria (Rayman 205). Question 4 An oligopoly refers to a market organization whereby a few companies that produce all or majority of the market’s supply of specific goods or services and whose resolutions regarding the industry's output might have effect on the competitors. Oligopolistic structures include supermarkets, banking sector and pharmaceutical businesses.  Oligopolistic firms don’t have competition on prices. The price wars have a tendency of lowering profits, and that would leave an insignificant change within the market share. On the other hand, Oligopolistic corporates have a tendency if charging a reasonable premium price but then again have competition through advertisements and various promotional strategies. Existing firms have enhanced safety against new firms that enter the market by heightening the obstacles to new entries in the market. For instance, in case the goods and services are intensively marketed and producing firms have a variety of existing effective brands, it would be too expensive and tough for new businesses to launch their own new brands within an oligopolistic market (Richard 238-240).  Oligopolistic firms are virtually in two different categories, they either compete with one another or collude with one another. When they are in collusion with one another, they eventually act as monopolies and thus maximizing the industry's profit. Nevertheless, these firms are usually faced with the temptation of competing with one another so as to attain more profit share within their sector.  If companies that are oligopolistic collude with one another, they come to an agreement on sales, prices, market share, advertisements and various decisions. This form of collusion lowers uncertainty that comes their way and increases the chances for monopolistic profits (Richard 238-240).  If the collusion takes place, the existing firms agree to have engagement in price fixing contracts or cartels. The main intention of the formation of the cartels is maximization of joint profits and making it possible for the businesses to behave as if they were purely monopolistic.  Just like in the monopolistic market, when the oligopolistic structures are retained for along tie, eventually, high prices are likely to be charged, less output might be produced and failure to maximize social well-being in relation to a healthy competition can occur.  A cartel is perceived by a government as a tactic meant to raise prices and profits. The raising of the prices and profits would against the interests of the public. Due to the above perception, it is unlawful to carry out such cartels within many nations. Tacit Collusion, evident in some oligopolistic market structures, is a collusion that isn’t planned in an official, open agreement between the colluding firms. The corporates stick to the prices that have been set by the recognized market leaders. The market leaders are generally the largest corporates i.e. the firms that control the sector referred to as the dominant corporate price leadership. In contrast, the leaders might be the firms that are most dependable to be followed, termed to as barometric firm price leaders (Richard 238-240).   Question 5 The Bank of England gives loans to the main commercial banks within England.  The Bank of England charges interests on the short-term credits it loans to commercial banks. The rates charged by the Bank of England has effect on the interest rates that the banking firms charge their clients since the commercial banks aim at recovering their cost (the interests they pay to the Bank of England) in addition to earning significant amount of profits (Chen 106-108). Whenever the Bank of England raises interest rates, the banking firms it loans to are compelled to raise their interest rates.  As the cost of borrowing rises, lesser consumers are likely to borrow the money from money lending firms.  Therefore, the Bank of England might decide to raise the interest rates in case it is of the idea that excessive economic activities are resulting to recession. The high interest rates would make recession lessen since it would be costing more for firms and customers to borrow from banking firms to finance the investment expenses or consumption ( for instance, the customers will not easily refinance mortgages on houses to free up expenditure money). As a result of increased restraining access to financial lending, the economic activities slow down and so does the recess pressures (Chen 106-108). The high interest rates would result to the appreciation of currency in the eyes of financiers, both domestic and overseas, since they are likely to be advantaged from high yields on the nation's assets. When the currency starts to appreciate in relation to different currencies, consequently, the Forex traders are likely to buy into it so as to trade with the tendency, sending still more money towards England (Chen 106-108). Thus, the Bank of England strikes a crucial balance. The Bank of England might aim at greater interest rates so as to give strength to the currency and enhance external investment, however, they are required to be conscious that greater interest rates have negative effects to the domestic firms and clients within England that depend on getting financial lending from commercial banks (Chen 106-108). Works Cited Chen, James. Essentials of foreign exchange trading. Hoboken, N.J: John Wiley, 2009. Print. Melvin, Boyes. Microeconomics, 5th ed., p. 180-187. Boston, MA. Houghton Mifflin, 2002. Print Mishkin, Frederic. The Economics of Money, Banking, and Financial Markets (Alternate Edition). p. 8. 2007. Boston: Addison Wesley, 2007. Print Rayman, R. A. A multi-gear strategy for economic recovery. Basingstoke: Palgrave Macmillan, 2013. Print. Richard, Fellows; ‎David, Langford; ‎Robert, Newcombe. Construction management in practice. Oxford England Malden, MA: Blackwell Science, 2002. Print. Read More