Free

Monetary Policy Wages, Markets and Income - Essay Example

Comments (0) Cite this document
Summary
Based on Woodruff's article, one of the primary factors, which would influence my decision to mortgage my home or finance the purchase of a big-ticket item, would be the interest rate. This is because apart from paying the principal in servicing resulting debt, I would also need to pay interest expense that is tantamount to the cost of borrowing…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER98.9% of users find it useful
Monetary Policy Wages, Markets and Income
Read TextPreview

Extract of sample "Monetary Policy Wages, Markets and Income"

Monetary Policy - Wages, Markets and Income What major economic indicators would you look at the most if you were planning on mortgaging a home or financing another large purchase
Based on Woodruff's article, one of the primary factors, which would influence my decision to mortgage my home or finance the purchase of a big-ticket item, would be the interest rate. This is because apart from paying the principal in servicing resulting debt, I would also need to pay interest expense that is tantamount to the cost of borrowing. This is mainly determined by the interest rate. In return, the interest rate may be derived through the key economic indicators such as the inflation, unemployment rate and gross domestic product (GDP).
In making these major decisions, the inflation is principally taken into account. As asserted by Woodruff, the real interest rate is defined as the interest rate minus the rate of inflation in the economy. Viewing it in another way, interest rate, specifically the nominal interest rate, is the real interest rate plus the inflation. The nominal interest rate is what is actually applied to my mortgage or loan application. With this, it becomes evident that an increase in inflation brings about an increase in interest rate. As such, should I perceive that inflation is relatively during a particular period, then I may defer my decision to apply for a loan or mortgage until inflation has been curbed as expected by economic agencies. This would generally lessen my cost of borrowing given the resulting lower interest rate.
Relative to inflation, Woodruff also noted that leading inflation indicators should be watched. These key reports include those on unemployment rate, employment cost index (ECI), GDP, consumer price index (CPI) and producer price index (PPI).
The employment reports of the Department of Labor are deemed as the "harbinger of inflation." This is because of the perceived inverse relation between inflation and unemployment rate, meaning with a lower unemployment rate-an uptick in inflation is expected. On the other hand, the ECI may also be monitored since it indicates if employers have increased wages. Given the direct relationship between wages and inflation, an increase in wages results in an increase in inflation.
Apart from these, the CPI, PPI and GDP may also be worth considering. The CPI and PPI show the price level of goods and services purchased by consumers and wholesalers. In this regard, they may be deemed as the main inflation indicators. Similarly, the GDP, although a harder indicator to analyze, may signal whether there is a change in inflation given the economic growth rate. This means that, generally, economists view that if the economy grows too fast, inflation would increase, and so would the interest rate.
2. How would Federal Reserve policy affect your decision to make such a purchase
The Federal Reserve (Fed) being the primary monetary body which controls the supply of money in the economy plays a crucial role in my decision. This is because, with its mandates, the Fed directly affects the interest rate regime. It may undertake either expansionary or contractionary policies to curb inflation, control interest rate and the growth of the economy. (Samuelson & Nordhaus)
For instance, if the government deems that the economy needs stimulation in order to produce more jobs for the untapped labor force, then the Fed may undertake expansionary monetary policies including the purchase of credit instruments in the open market (e.g. treasury bills), lowering the discount rate (interest rate that bank is charged for short-term borrowings from Fed through discount window) as well as the reserve requirement. These monetary actions have direct bearing on the interest rate. This is because when the Fed purchases securities in the open market, the price of securities is jacked up, thus, they become a more attractive investment over saving in bank or other investments that requires bank borrowing so interest rate decreases.
In the same way, a lower discount rate essentially entails lower interest rates for borrowing and lending. Similarly, lower reserve requirement leaves banks with more cash which they could invest in other projects like purchasing of bonds and other credit securities. This, in turn, causes the price of these alternative investments to rise and reduces interest rate. (Samuelson & Nordhaus)
The reverse process applies for contractionary monetary policy.
In view of the above, prior to making my major financing decision, I would be better-equipped to make the optimal choice by looking at the direction taken by the Fed since its actions indicates what the interest rate regime would be.
Reference
Samuelson, P.A. and N.D. Nordhaus. Economics. McGraw-Hill Companies. 1998.
Woodruff, T. A borrower's guide to forecasting interest rates. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Monetary Policy Wages, Markets and Income Essay Example | Topics and Well Written Essays - 500 words”, n.d.)
Monetary Policy Wages, Markets and Income Essay Example | Topics and Well Written Essays - 500 words. Retrieved from https://studentshare.org/miscellaneous/1525059-monetary-policy-wages-markets-and-income
(Monetary Policy Wages, Markets and Income Essay Example | Topics and Well Written Essays - 500 Words)
Monetary Policy Wages, Markets and Income Essay Example | Topics and Well Written Essays - 500 Words. https://studentshare.org/miscellaneous/1525059-monetary-policy-wages-markets-and-income.
“Monetary Policy Wages, Markets and Income Essay Example | Topics and Well Written Essays - 500 Words”, n.d. https://studentshare.org/miscellaneous/1525059-monetary-policy-wages-markets-and-income.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Monetary Policy Wages, Markets and Income

Monetary Policy

...% in late 2007 to 0.5 percent in the middle of 2010.( Sandra Pianalto,2011) Therefore, the actions of the Monetary Policy are focused on establishing programs to provide liquidity to financial markets and to get credit flowing again. In order to deal with this situation the Federal Reserve purchased $1.7 trillion worth of mortgage-backed securities, government agency debt, and Treasury securities which resulted in lowering the long term interest rates. Further a second round of large-scale asset purchases was also done in order to support economic activity and strengthen economic growth and reduce the risk of inflation lessening below zero for a sustained period. Consequently, the...
3 Pages(750 words)Essay

Monetary policy

...the supply of money in the economy while the contractionary measurers reduce the total money supply to the economy (Bofinger, Reischle and Schachter 123). Expansionary policy is theoretically used to control unemployment in a recession by lowering interest rates in the view that easy credit will motivate businesses into expanding. Contractionary policy is intended to slow inflation in a view of curbing the resulting deterioration and distortions of asset values. The Monetary policies advocated by the central bank helps in fostering the growth of financial market by encouraging open market operations. It is the most used tool by the...
7 Pages(1750 words)Research Paper

Monetary policy

.... The monetary policy frame work can also be used das a method of raising credibility to such a policy (Hammonds, 2006). Part B Essay One What are the costs of disinflation? To what extent do the costs of disinflation depend on the authorities’ “credibility”? In what way can “credibility” be raised? Inflation results to uncertainty in the investments and savings carried in the future. Rent searching takes place only when some resources are merely used to transfer wealth than producing it. For instance, a company tries to measure and battle out the cost of inflation. Inflation redistributes income from those on permanent incomes like pensioners and shifts...
10 Pages(2500 words)Assignment

Monetary Policy

...allocation of payroll must occur. The CEOs, as in the time of the S&L crisis, need to accept some of the operational risks rather than designing stock options which eliminate risk. Employees pay structure must increase as a percentage of profits, as Henry Ford created his own consumers. The free market determines CEO pay, but the market demands more equitable distribution of the profit from labor. The recommendation to the Board would be, not an increase in minimum wage, but a minimum percentage split of profits to the labor force. The executive pay was limited to $1 million per year for tax deductibility. In order to circumvent this edict, companies gave executives stock options which...
8 Pages(2000 words)Essay

Monetary policy

...? Monetary Policy Answer one: Official cash rate is that rate of interest set by the Board of the ReserveBank of Australia which is charged on the overnight funds that are borrowed or lent between financial institutions. This implies that it is that rate which is charged by financial institutions in Australia’s banking sector to other banks for overnight loans. This official cash rate is an important monetary policy instrument that influences other interest rates within the market. The RBA often determines the official cash rate after deciding on what monetary policy target it intends to attain (Reserve Bank of Australia,...
5 Pages(1250 words)Essay

Monetary policy

...raising the level of retrenchment (Bofinger, Reischle & Scha?Chter, 2011, p. 45). The unemployment rate should be narrowed down so that the national income can go up through the multiplier effect and this is only possible if the Bank of England comes up with strategic policies that would inject finance into the economy. The best approach for this is to promote economic stimulus through the expansionary policies of Federal Open Market Committee’s (FOMC). Open market operation would help in regulating the amount of money in supply to ensure that there are constant prices as this is important in controlling inflation rates and defining the labor...
8 Pages(2000 words)Essay

FINANCIAL MARKETS AND MONETARY POLICY

...? FINANCIAL MARKETS AND MONETARY POLICY By The of the The of the School The City and State where it is located The Date Introduction This is the Broad word that describes any market whereby there are consumers and vendors who in this case participates in the job of possessions such as shares, bonds and currencies and the derivatives. The markets are however characteristically distinct by taking the clear pricing, the basic rules and guidelines for trading, expenses and fees and the market powers that determine the amounts of securities that are able to trade. However, some financial marketplaces are only giving authority to participants...
7 Pages(1750 words)Essay

FINANCIAL MARKETS AND MONETARY POLICY

...? FINANCIAL mARKETS AND mONETARY THEORY al Affiliation) Key words: Monetary Policy, Financial Market Term Structure of Interest Rates The interest rates’ term structure and economy are closely related. Conversely, the anticipations of real activity and future inflation can be crucial in determining the yield curve. However, the yield curve can have a predictive power and strength for both real activity and inflation. The strong relationship between macro economy and the yield curve has been the conventional theme of a growing empirical theory (Stander, 2005). Various theories have been generated to show that the relationship is bi-directional; Nelson Siegel model. Other research has offered a concrete evidence favoring instability... on the...
8 Pages(2000 words)Essay

Monetary policy

...Monetary policy QN1. Four Chapters in “In Fed we Trust” Ten items I never new of before reading the book Key Playersof the worst financial Crisis i. Three men were responsible in managing the Great Panic. ii. The key individuals were the Treasury Secretaries, Mr. Hank Paulson, The Federal Chairman, Mr. Ben Bernanke, and Tim Geithner. iii. Details of each key player’s characteristics, and there effects on incomes. iv. Their personalities had a noticeable effect on the impacts their decisions had on the monetary system. v. The negative effects of their moves on the psyche of the markets vi. Geithner and Paulson were more prone to Gaffs than Bernanke in...
2 Pages(500 words)Assignment

FINANCIAL MARKETS AND MONETARY POLICY

...FINANCIAL MARKETS AND MONETARY POLICY The Official Bank Rate and Macroeconomic and Financial Circumstances The official bank rate is also referred to as Bank of England base rate which is the rate of interest that the Bank of England levies Banks for collateralized overnight loans. The British government uses this as the main monetary policy implementation. It is more comparable to the United States’ discount rate compared to the Federal funds rate. The safety for giving loans can be among the list of the authentic collaterals which are transacted as overnight Repos that might be very expensive to banks at times (Capie, 2010, p. 510). The official bank...
7 Pages(1750 words)Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Monetary Policy Wages, Markets and Income for FREE!

Contact Us