(Professor Name)
Answer 1)
Increase in interest rates is virtually an important number to consider for the US Economy with Interest Rate of 10 year US Treasury Securities going up from 1.48% in 2012 to record high of 2.86% this August. Considering the present situation of Federal Budget, US Economy is living in trap of greatest debt bubble of the millenium. However, economists and other finance professionals are expecting these interest rate continue to go up:
- US Economy is strengthening and this makes suration risk in bond portfolio a seriosu concern for investors.
- Investors are growing concerned that yields, which move inversely to prices, have bottomed for the 10-year Treasury and could surge, raising fears of a bond bear market along the lines of the Great Bond Bear Market of 1994.
- If the economy continues to maintain its current recovery, and perhaps gain some momentum with unemployment maintaining its gradual descent, and inflation expectations remain near 2%, we think 10-year yields can be expected to rise gradually over the next few years.
Answer 2)
Where in our initial analysis we found that it was growing US Economy that forced Interest Rates to go up but the statement of Federal Secretary is just opposite of what we analyzed. If he is correect then we must obeserve the trend of Aggregate Demand during the years of Economic Recovery from 2008-2013 that could lead to ultra threatening Inflation and forced the US Government to adopt the tools of monetary policy.
Answer 3) MS’’
MS
MD
The above graph represent MS/MD setting where intersection of both the curves lead to equilibrium interest rates in the economy. The above graph represents the effect of fall in money supply that leads to increase in the interest rates. Generally this measure is adopted to tighten the economic growth.
Ofcourse there is difference between money demand for Investment and for deficit spending. The former relates to economic growth while latter is to cover up its budgetary deficits. An economy will always prefer to raise demand for money for investment purpose provided it is not on the brisk of inflation.
Answer 4)
In order to stop the increasing trend of interest rates, Federal Government should move to reduce its buy back activity popularly known as Open Martket Operations. In other words, federla government should ease its policy of purchasing assets from open market until interest rates falls.
Answer 3) MS’’
MS
MD
**Figure 1
Considering the present situation where Interest Rates are moving up as disclosed in figure 1, Federal government once ease its buy back policy, this will increase the money supply in the economy. With money supply increased, this will shift the MS Curve to the right and thus resullting in lower interest rates as disclosed in the diagram below.
MS’’ MS’’’ MS
MD
Answer 5)
If federal government consider the ill effects of increasing interest rates and decide to follow the policy of easy buy back policy, it will stop or will purchase lower quantity of securities from the open market. As a result, this will allow liquiidty to sustain inthe economy. However, federal agencies should consider the effects of inlfation which may come up with increased supply of money and the policy should be based only after considering as what level of increased money supply will reduce interest rates and shall not lead the US Economy to inflation.
Works Cited
Upadhaya, Paresh. Why U.S. Interest . Research Report. Boston: Pioneer Investments, 2013. PDF Document.
