AN INSIDE LOOK AT POLICY Increased Lending Boosts Money Supply Gro.docx

AN INSIDE LOOK AT POLICY Increased Lending Boosts
Money Supply Growth
FISCAL TIMES
Bank Lending Signals a Strengthening Economy
The financial crisis of 2008 rocked the foundation of the U.S.
banking sector. The shock left banks short of capital and
hesitant to lend, even as the recession cut deeply into loan
demand. The Federal Reserve has pumped in an ocean of
lendable funds, trying to prime the process of bringing banks
and borrowers together. But many still wonder when, if ever,
bank lending will return to normal.
We’re not there yet, but recent signs have been encouraging.
Despite the sluggish economy, loan growth is finally beginning
to pick up in key areas, reflecting both greater willingness to
lend and increased desire to borrow. Loan volume of U.S.
commercial banks rose at a one percent annual rate in June as
expansion in business loans and non-mortgage consumer
lending more than offset the ongoing contraction in real estate
financing. It was the third consecutive monthly increase after
steady declines for more than two years....
a Lending to businesses is leading the credit upswing. The
volume of commercial and industrial (C&I) loans in the second
quarter rose at a 9.6 percent annual rate, the largest increase in
2½ years. Banks have progressively eased lending standards for
C&I loans to large and medium-sized companies for the past six
quarters. Small companies have seen easier terms and
conditions in each of the past four quarters. Economists expect
to see signs that this loosening in standards is continuing when
the Fed issues it third-quarter report from bank senior loan
officers in mid-August.
More credit is starting to flow to small businesses, as well.
That’s important, because small firms account for about half of
U.S. job creation, and depend greatly on banks for credit, unlike
large corporations that have the option to raise funds in the

capital markets by issuing bonds. In the second quarter, the
balance of banks reporting stronger vs. weaker demand for
commercial and industrial (C&I) loans by small businesses was
positive for the first time in five years, according to the latest
Fed survey. Another positive sign is the gradual rise in C&I
loans made by small banks, whose customers tend to be small
local companies. Small-bank C&I loan volume has been rising
gradually in 2011 after hitting bottom late last year.
Despite increased attention by policymakers over the past year
to the dearth of small business lending, the problem has been
not so much banks’ unwillingness to lend but simply a lack of
loan demand, reflecting weak sales. Although the percentage of
small companies saying credit is harder to get is still somewhat
higher than before the recession, it has fallen steadily over the
past two years, from a peak of 16 percent, to 9 percent in June,
according to the National Federation of Independent Business.
b Banks are also warming to consumer loans. Despite sluggish
job markets, households have made great progress in getting
their financial obligations under control, allowing qualified
borrowers to take on more debt. So far this year, monthly
financial obligations of households have fallen to only 16.4
percent of household income, the lowest since 1994. In the
second quarter, the percentage of banks reporting increased
demand for auto loans was the highest since 2003.
Banks began easing lending standards for auto loans, credit
cards, and other borrowing this time last year. In the 2011
second quarter the percentage of loan officers saying they were
more willing to make consumer loans rose to the highest level
in 17 years....
c The ebb and flow of bank lending during recessions and
recoveries exerts a powerful force on any business cycle. Aside
from this cycle’s problems in mortgage lending, banks are
finally beginning to behave as they usually do in a recovery.
Barring some new shock, especially from the debt troubles in
Washington or Europe, evidence that loan growth is beginning
to expand in response to easier lending standards and stronger

loan demand is a key sign that the recovery has staying power.
Source: “Bank Lending Signals a Strengthening Economy” by
James C. Cooper, from Fiscal Times website, August 1st, 2011.
Copyright © 2011 by The Fiscal Times. Reprinted with
permission.
Key Points in the Article
The financial crisis of 2007–2009 resulted in decreases in both
the supply of funds available to lend and in the demand for
those funds. Despite the Federal Reserve’s infusion of large
amounts of funds into the economy, bank lending continued to
decline for more than two years. In April 2011, loan volumes
finally began to increase. The largest increase occurred in
business lending, with the volume of commercial and industrial
(C&I) loans rising at an annual rate of 9.6 percent for the
second quarter of 2011, which was the largest increase in over
two years. The increase in small business lending was
particularly encouraging, with banks in the second quarter
reporting increased demand for small business loans for the first
time in five years. The market for consumer loans was
improving as well. As consumer debt as a percentage of income
fell to its lowest level since 1994, banks became more willing to
make consumer loans. The expansion of loan growth was a
positive sign for the economy during what had been a sluggish
recovery from the recession.
Analyzing the News
a As we saw in Chapter 9, banks help channel funds from savers
to borrowers by making loans to individuals and businesses.
Rising defaults on home loans after the housing bubble burst led
to the collapse of a number of financial intermediaries in 2008,
and loan volume declined for more than two years. Growth in
the market for loans reemerged in the second quarter of 2011,
with business loans leading the up-swing. Commercial and
industrial loans rose at an annual rate of 9.6 percent as banks
continued to loosen lending requirements for small, medium,
and large companies. As Figure 1 below shows, the percentage
change in commercial and industrial bank loans turned positive

toward the end of 2010, and it accelerated for much of the
second quarter of 2011.
b Loans to consumers began to increase in mid-2011. Following
the collapse of financial markets in 2008, banks were much less
willing to make consumer loans, increasing their lending
standards as households’ financial obligations grew. The
decrease in the supply of funds available to households was met
with a decrease in the demand for these funds as households
worked to reduce their debts. As household debts became more
manageable, banks became increasingly willing to make
consumer loans, as shown in Figure 2 below.
c As you read in this chapter, banks create money by loaning
out excess reserves. Because of the money multiplier process, a
given amount of new reserves results in a multiple increase in
bank deposits. In an attempt to bring lenders and borrowers
together following the financial crisis of 2008, the Federal
Reserve made a large amount of new funds available to
financial markets. These extra funds had the potential to affect
the economy as banks, responding to an increase in demand,
finally began to see an increase in loans in 2011. The increases
in excess reserves, bank deposits, and loan volume are
indications that the economy was in the expansion phase of the
business cycle and were positive signs for continued economic
recovery.
Thinking Critically About Policy
1.During the financial crisis of 2007–2009, the Fed attempted to
stimulate the economy by taking actions to increase the money
supply. How effective would these actions be if banks remained
reluctant to make consumer loans while households remained
reluctant to obtain loans? Briefly explain.
2.The quantity theory of money predicts that a large increase in
the money supply will result in inflation. Why, then, even
though the money supply increased rapidly was inflation
relatively low during the recession of 2007–2009 and its
immediate aftermath?
(Glenn 856-857)

Glenn, R., Anthony Patrick. Economics, 4th Edition. Pearson
Learning
Solution
s, 1/2012. VitalBook file.
Running head: APPLICATION OF ECONOMIC PRINCIPLES
1
APPLICATION OF ECONOMIC PRINCIPLES
9
Economic Principles
Student’s Name
Professor’s Name
Institution
Date
Situation D

On considering a shift from his corn growing business that
Uncle Dan has been engaged to for many years, his option to
move to a more profitable housing market, several factors need
to be given a deep insight and consideration. These factors are
of great importance in understanding this market better and
knowing the risks and benefits that await entrance in the
housing market. Understanding the market is important since it
prepares one for the many challenges that could be awaiting one
in the future and the transition phase from one business activity
to the other. Understanding the market should be the guidance
in making shifts from one business to venturing in another one.
After reading the article “Will the Fed’s New Policies
Revitalize the Housing Market?” on pages 896 of the textbook,
the following are the deductions I made about and the future of
the housing market and the economy and they would form the
basis of my advice to Uncle Dan;
GDP Growth Rate

The Feds aim at coming up with measures to revitalize the
economy. Revitalization of the economy is aimed at making the
economy healthier than it is at the moment. Making the
economy healthy would mean a positive transition in terms of
GDP. The revitalization of the economy is expected to have a
direct impact on the different factors of GDP that include; the
consumption and expenditure at individual levels, investment in
business activities and ventures, increased expenditure by the
government and increased export of goods and services (Cheng,
2001).
The “operation twist” and the new MBS reinvestment policy are
expected to have a positive impact by enhancing growth in the
GDP. As one of the factors in GDP, this means that the rate of
personal spending on purchasing new houses would increase.
An increase would mean that Uncle Dan’s new plan to invest
more in the housing sector would end up producing very
positive and high returns just as he expects of the housing
alternative new business venture (Sullivan, 2003).
Since the economy is expected to register positive economic

growth through the GDP, people are more likely to invest in
businesses either through starting up new businesses or
expanding the already existing businesses. The shops that Uncle
Dan would build would, therefore, have people to invest and
startup new businesses. These people would pay rent to Uncle
Dan, and this way, his income and profits would be increased
(Grossman, 1995).
The plan by the Fed’s that would see positivity in the GDP of
the economy provides a positive background and one that is
highly promising for Uncle Dan’s new investment plan and a
shift in the direction of the housing market would be profitable
for him.
Interest Rates
The interest rates are another factor that needs to be
considered. Could be that Uncle Dan requires some borrowing
in his new venturing plan in the housing market. According to

the plan by the Fed's, they plan to implement two policies and
these are Operation twist and MBS reinvestment policy. These
two are expected to have a direct effect on the mortgage interest
rates. According to these plans by the Fed's, the new mortgage
rates should be well under or below 4%. This would mean that
Uncle Dan's would be facilitated by many people having access
to mortgages to buy new houses (Sullivan, 2003).
The plan by the Fed's would motivate people to take up
mortgages t buy new homes. Uncle Dan's new-built homes
would, therefore, find a market full of buyers who have an
exchange of what is required to have a new home. Low-interest
rates on a loan attract people to take up loans. The risks
associated with low-interest rate loan are the greatest
motivation towards people taking up the loan (Cheng, 2001).
This way, I would advise Uncle Dan to build the homes since
the plan by the Fed's would be a tool for encouraging people to
want to acquire more loans to buy the houses. The presence of
ready buyers of the houses means a positive future for his new
business plan and venture.

Level of Unemployment
Employment levels are the key determinant of the spending
levels of the people. When the level of unemployment goes
high, the disposable income by the people reduces and this has a
direct effect on any other factor in the economy. Without
employment, the GDP doesn’t grow since the consumption level
is low.
At the moment, firms are barely hiring new employees. This
could be because their rates of consumption are low, the rates of
investment and expansion of existing businesses is low, and the
rate of export and production is low. The increase in the GDP as
stated earlier is expected to have an impact on all these factors
that are determinants of employment and hiring by firms. If the
GDP increases, the employment rates are also expected to
increase and so will be the rate and amount of disposable
income by individuals. They would be able to save more and to
invest more in the newly built houses. People would also be
able to save and startup new businesses (Grossman, 1995).

The employment rates may be experiencing depression, and
they may be at high levels but there is a promising and a
positive future for the employment sector. Since all other
factors that affect it are expected to transform positively, so it
is going to be for the employer new homes.
The Business Cycle
The business cycle in the past year hasn’t been a very promising
one. This is because low-interest rates that are expected to have
a direct effect on the purchase on new homes did not have an
effect on the purchase rates. The mortgage rates required to buy
new homes were relatively low and despite this, the number of
people who bought new houses and homes was tiny.
The new rates of mortgage rates are relatively lower compared
to those of the previous year. The lower rates are expected to be
a motivating factor for buyers. Since the future could see an

increase in mortgage rates, people are likely and are expected to
take advantage of this aspect to take up mortgages and buy new
homes. The levels of uncertainty that the rates of purchase of
new homes are low and the low rates are meant to serve as a
motivation. This translates to a bright future for Uncle Dan's
plan of building
Fiscal Policy
The government’s policies on spending are positive and highly
supportive of the new plan by the Fed’s. The government has
been of the position and has shown its support for the
refinancing of and an increase in mortgages. The government is
expected to respond positively to the new plan of the Fed's
since it hasn't indicated any negative signs about the plan
earlier. The idea that the administration of president Obama has
been advocating is meant to enhance and stabilize the housing
sector, and so is the plan and objective aimed at by the Fed's
(Larch, 2009).

Monetary Policy
The central Bank plans to invest from or through agency bonds
and mortgage-backed securities. These actions by the central
bank are aimed and directed towards enhancing the demand for
mortgages and subsequently reduce the rates of interest of
mortgages. A reduction in mortgage rates would mean increased
borrowing and subsequent increment in the rate of purchase of
new houses. The monetary policy sounds and predicts a positive
and highly promising future for the government. The monetary
policy prepares a bright and promising future for the industry
that Uncle Dan aims at investing. The housing market might not
be performing positively at the moment, but the current
monetary policy by the central government provides a very
positive future for the housing market. The actions by the
central bank, the Fed's and the government are aimed at creating
stability in the housing market (Larch, 2009).
International Trade

International trade has been on the increase in the past few
years. Technology among other factors integrated altogether has
been a factor for increased international trade. International
trade promises a bright and very positive future. An enhanced
international trade would mean increased production for export
and subsequent increase in the employment rates in firms.
Hiring and increase in employment opportunities mean
increased disposable incomes by individuals and families. The
disposable income would be used to purchase new homes and
hence, the housing market would benefit greatly from increased
international trade (Sullivan, 2003).
Demographics
There seems to be an increase in the middle class in the
population and subsequently, there is an increase in the
population of people not only in the country but also worldwide.
Increased populations call for an increase and expansion in the
housing industry. An increasing middle class also predict a

positive future for the housing industry (Larch, 2009). The
middle class is well able and capable of purchasing new homes,
and they are also expected to live in new homes according to
their living standards and placement in the society. This
translates to a positive and promising future for the housing
industry (Grossman, 1995).
Recommendations
After taking a close look at the nature and the status of the
housing market and its probable future, I would recommend the
following to Uncle Dan;
Since the mortgage rates are likely to reduce, there is likely to
be an increased demand and access to mortgages by individuals.
This is going to enhance access to and increased purchase of
houses. Uncle Dan should take up this prediction and
probability to build new houses. The low rates of mortgages are
expected to motivate people to go for the mortgages and buy

new homes (Grossman, 1995).
The GDP is likely to increase and, therefore, people are more
likely going to invest more. More businesses are likely to spring
up, and the existing ones expanded. The shops that Uncle Dan
intends to build are, therefore, likely to lend more and this way,
Uncle Dan will have income and profits will be generated
(Larch, 2009).
Demographics shows that the future is bright for the housing
market and the demand for houses and homes is ultimately
expected to arise and increase. Since its projected that more
houses will be required in future, Uncle Dan's idea of turning
his former corn growing activity into a house building one is
likely to have positive returns.
I would like to recommend and advise Uncle Dan to go ahead
and take up and implement his idea of building houses and
shops in his farm. The housing industry is likely to be
revitalized by the Fed’s plan and this way, Uncle Dan would be
able to make bigger profits.

References
Cheng, L. (2001). Global Production and Trade . Boston:
Springer US.
Grossman, G. (1995). Handbook of International Economics.
Amsterdam: Elsevier.
Larch, M. (2009). Fiscal Policy Making in the European Union.
Routledge.
Meredith, G. (2002). Managing by defining moments:
Innovative strategies for motivating 5 very different
generational cohorts. New York: Hungry Minds Inc.
Sullivan, A. (2003). Economics : principles in action. Needham:
Prentice Hall.
ECON545: Project 2—Macroeconomic Analysis
The Macroeconomic Paper tests your ability to apply economic

principles to a business decision considering the impact of
macroeconomic variables. Select one situation from the items
outlined below: A to D. Complete the paper on the selected
situation as specified below. The completed paper is a
professional report and is due in Week 6 (260 Points). See the
grading rubric at the end of this document. Be sure to use the
DeVry library to find data, and avoid questionable sources, such
as Wikipedia.
Each of the scenarios has a list of Macroeconomic areas you are
to address, with sources, in your answer. Briefly you are to
research and show how these apply to your scenario: GDP
growth rate (20 points), the business cycle (30 points), fiscal
policy and level of unemployment (50 points), monetary policy
and interest rates (50 points), international trade (40 points),
and demographics (20 points).
Situation C
Cousin Edgar is always thinking of the next business idea. This
time, he plans to invest in buying four gas stations. He reckons
American consumers have come to accept the high gasoline

prices, and estimates world prices for gasoline to increase even
further with high demand from India and China. Besides,
Cousin Edgar thinks he will make a good profit on the sale of
convenience items at each station. But before buying the gas
stations, he decides to ask for your advice because you are
taking this course in business economics.
You happened to read the piece “Bank Lending Signals a
Strengthening Economy” on page 856 of the textbook. Cousin
Edgar needs financing for his new business, but you realize
there are more macroeconomic factors he needs to consider in
timing his decision. You decide to research the economy in
terms of GDP growth rate, interest rates, level of
unemployment, the business cycle, fiscal policy, monetary
policy, international trade, and demographics. You want to
provide Cousin Edgar with the most informed advice possible.
Macroeconomic Paper as a Professional Report
Your paper should be organized into five parts as listed below.
1. Title Page: Name, class, and date
2. Introduction to situation but do NOT copy the scenario.
Briefly summarize the situation and identify the macroeconomic
issue(s) to be decided from the perspective of the organization.

3. Business Cycles, Unemployment, Inflation, International -
Comparative Advantage, Exchange Rates, Trade, Etc., Monetary
Policy and Interest Rates, and Fiscal Policy and Unemployment
Identify the variables that are critical in addressing the issue(s).
Gather and present the relevant data on the variables by
searching the DeVry Online Library. Ask a librarian for help if
needed. Use in-text citation to report the source(s) of the data.
Graphs may be included here.
4. Recommendations and Economic Justification
Formulate and present your recommendations for addressing the
issue(s) based on the relevant data and economic principles
identified above. Justify your recommendations in terms of the
economic impact on those affected.
5. References
List the full references for at least five sources alphabetically in
APA format.
Grading Rubric
Section
Points earned

Points
Description
Paper Presentation
10
Good format, citations, lack of spelling errors, etc.; correct
Title page and Reference page
Relevant Data:
GDP, Business Cycle, International, Monetary Policy, Fiscal
Policy, Demographics
210
GDP (20 points)
Business Cycles, Unemployment, Inflation (30 points)
International (40 points)
Monetary Policy and interest rates (50 points)
Fiscal Policy and unemployment (50 points)
Demographics (20 points)

Recommendations
40
What are your recommendations explained by your analysis?
Total
260

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