Macroeconomic Trends - Impact on Investment Decision ProcessVeronica Lopez-Lopez
There are various reasons why it is essential to consider macroeconomic projections and trends when making investment decisions. Before making the appropriate investment decisions, investors must find an accurate macroeconomic forecast. Therefore, investors should be aware of the basic realities offered in macroeconomic theory.
Although not all economists agree, the majority believe that distinct methodologies are required to research specific markets and the entire economy. Therefore, the current contrast between microeconomics and macroeconomics is critical when making investment decisions. Although most economists agree on the basic assumptions of microeconomic analysis, macroeconomics arose from a discontent with microeconomics' expected outcomes. As a result, the conclusions drawn from macroeconomic studies are not widely accepted but also necessary to consider.
Macroeconomics uses aggregated statistics and other factors to try to measure economy-wide phenomena. As a result, complicated variables are frequently held constant in microeconomics to isolate how actors respond to specific changes. This is a shift in macroeconomics, where historical data is acquired first, and then themes of unexpected results are investigated. To be done correctly, this necessitates a massive amount of knowledge, and in some cases, macroeconomists lack the necessary measurement tools. Therefore, an investor should be careful when making an investment decision for this reason.
Macroeconomists often disagree on how to gauge the effectiveness and make predictions. As a result, it's easy for investors to draw inaccurate conclusions or even use signs contradicting each other. In addition, investors should study basic economics, although the field's shortcomings provide plenty of opportunities for investors to be misled.
2. IB UNIT 3 - INTERNATIONAL MONETARY SYSTEM .pptxShudhanshuBhatt1
This PPT deals with
The International Monetary System which refers to the framework of rules, institutions, and procedures that govern international financial transactions and exchange rate arrangements among countries.
Macroeconomic Trends - Impact on Investment Decision ProcessVeronica Lopez-Lopez
There are various reasons why it is essential to consider macroeconomic projections and trends when making investment decisions. Before making the appropriate investment decisions, investors must find an accurate macroeconomic forecast. Therefore, investors should be aware of the basic realities offered in macroeconomic theory.
Although not all economists agree, the majority believe that distinct methodologies are required to research specific markets and the entire economy. Therefore, the current contrast between microeconomics and macroeconomics is critical when making investment decisions. Although most economists agree on the basic assumptions of microeconomic analysis, macroeconomics arose from a discontent with microeconomics' expected outcomes. As a result, the conclusions drawn from macroeconomic studies are not widely accepted but also necessary to consider.
Macroeconomics uses aggregated statistics and other factors to try to measure economy-wide phenomena. As a result, complicated variables are frequently held constant in microeconomics to isolate how actors respond to specific changes. This is a shift in macroeconomics, where historical data is acquired first, and then themes of unexpected results are investigated. To be done correctly, this necessitates a massive amount of knowledge, and in some cases, macroeconomists lack the necessary measurement tools. Therefore, an investor should be careful when making an investment decision for this reason.
Macroeconomists often disagree on how to gauge the effectiveness and make predictions. As a result, it's easy for investors to draw inaccurate conclusions or even use signs contradicting each other. In addition, investors should study basic economics, although the field's shortcomings provide plenty of opportunities for investors to be misled.
2. IB UNIT 3 - INTERNATIONAL MONETARY SYSTEM .pptxShudhanshuBhatt1
This PPT deals with
The International Monetary System which refers to the framework of rules, institutions, and procedures that govern international financial transactions and exchange rate arrangements among countries.
MACROECONOMIC FOCUS AND INDUSTRY ANALYSIS .docxsmile790243
MACROECONOMIC FOCUS AND INDUSTRY ANALYSIS 1
MACROECONOMIC FOCUS AND INDUSTRY ANALYSIS 2
Milestone Two
Macroeconomic Focus and Industry Analysis
NOTE: highlighted any change you made. Know which one is revised. Thanks.
Note: See all highlighted on yellow comments and revised it.THANKS.
Macroeconomic Focus and Industry Analysis
Macroeconomic forecast of the monetary school of thought.
From a monetarist perspective, regulation of the flow and circulation of money is important in determining and influencing preferred economic conditions in the United States. Reducing the circulation of money in the economy has many effects on the macroeconomic environment and determines the activities of other stakeholders in the financial market. From a monetarist school of thought, the government has sole responsibility to both country and citizens in ensuring favorable monetary policies are implemented that are akin to the prevailing economic conditions through the control of inflation and prevention of deflation in the country (Fair, 2011).
Reducing the supply of money in the economy has effects on the macro-economic Cory Kanth:
This point is not clear. It needs clarification in terms of better explanation.
environment as earlier mentioned. Reducing money circulation has both short run and a long run effect that shift practices in the economic environment. For instance, consumer spending is affected by the implementation of monetary policies. When the government implements monetary policies that do not favor money circulation, consumer spending capabilities are significantly reduced (Fair, 2011). The reduction in the spending is due to the reduced flow of money in the financial market which limits the funds accessible to consumers in the market. This policy is usually exercised in a bid to control inflation in the market where prices go up due to increased demand catalyzed by the availability of money in the hands of the spenders.
Reducing the growth of money circulation from a monetary perspective is empirical in determining the cost of labor. When there is a circulation of money in the market, individuals can opt for willing unemployment due to the availability of funds through other sources other than the low paying jobs (Gnimassoun & Mignon, 2015). Further analysis on the effect of reducing money circulation is the government stabilizes the prices of labor meaning little choice is left for personnel who may discriminate employment due to reduced wages or low salaries.
Investment spending is a factor directly affected by the increase in interest rates. This is because investors avoid high lending rates due to high interests that are amassed over operational periods. Moreover, increased lending rates affect investment spending since capital and ...
Navigating Economic Uncertainty: A Strategic Approach to Informed InvestmentsAstute Connect
Navigating Economic Uncertainty: A Strategic Approach to Informed Investments" offers a concise guide to managing investments amidst unpredictable economic landscapes. The focus is on adopting a strategic mindset to make well-informed financial decisions in the face of economic uncertainty. The summary emphasizes the importance of strategic planning and informed investment choices as essential tools for individuals and businesses seeking stability and growth in turbulent economic times.
Present study questions the role of monetary policy in general and inflation targeting in particular with the help of important issues related to it and concludes that it is high time for a change. An irony of the inflation targeting is that price stability has amazingly been achieved in Canada simultaneously with an over-leveraged financial system and an over-exposed economy to the debt and assets. And also, the low policy rate regime under the framework has not been able to stop the investment from decline and the real economy from stagnation.
Non-monetary effects Employee performance during Financial Crises in the Kurd...AI Publications
The crisis of 2014-2018 has focused attention on money and credit fluctuations, financial crises, and policy responses. The main aim of this research was to examine the non-monetary factors affecting employee performance in Kurdistan region of Iraq as general and Erbil as particular. However, the researcher developed five research hypotheses to be tested and measured to evaluate employee performance during financial crises. The researcher implemented simple regression analysis to measure the developed research hypotheses, it was found that the highest value was for job security, this indicates the job security has the most powerful and positive association with employee performance during financial crisis, on the other hand the least powerful was found to be job enrichment that influences and related to employee performance during financial crisis in Kurdistan region of Iraq.
QUALITY ASSURANCE FOR ECONOMY CLASSIFICATION BASED ON DATA MINING TECHNIQUESIJDKP
Researchers in the quality assurance field used traditional techniques for increasing the organization income and take the most suitable decisions. Today they focus and search for a new intelligent techniques in order to enhance the quality of their decisions. This paper based on applying the most robust trend in computer science field which is data mining in the quality assurance field. The cases study which is discussed in this paper based on detecting and predicting the developed and developing countries based on the indicators. This paper uses three different artificial intelligent techniques namely; Artificial Neural Network (ANN), k-Nearest Neighbor (KNN), and Fuzzy k-Nearest Neighbor (FKNN). The main target of this paper is to merge between the last intelligent techniques applied in the computer science with the quality assurance approaches. The experimental result shows that proposed approaches in this paper achieved the highest accuracy score than the other comparative studies as indicates in the experimental result section.
Financialization, Rentier Interests, and Central Bank PolicyConor McCabe
Financialization, Rentier Interests, and Central Bank Policy
Gerald Epstein
Department of Economics and Political Economy Research Institute (PERI)
University of Massachusetts, Amherst
December, 2001; this version, June, 2002
Global Financial Crisis and its impact on economic growthKruti Kamdar
What is Financial Crisis?
Definition: A situation in which the supply of money is outpaced by the demand for money.
This means that liquidity is quickly evaporated because available money is withdrawn from banks, forcing banks either to sell other investments to make up for the shortfall or to collapse. A financial crisis is often associated with a panic or a run on the banks, in which investors sell off assets or withdraw money from savings accounts with the expectation that the value of those assets will drop if they remain at a financial institution...
Rania Al-Mashat - Minister of Tourism
ERF 24th Annual Conference
The New Normal in the Global Economy: Challenges & Prospects for MENA
July 8-10, 2018
Cairo, Egypt
Foreign Exchange Intervention and Currency Crisis (The Case of Korea During P...K Developedia
Title: Foreign exchange intervention and currency crisis
Sub Title: The case of Korea during pre-crisis period
Material Type: Report
Author: Kang, Sung-Kyung
Publisher: KDI School of Public Policy and Management
Date: 2000
Pages: 69
Subject Country: South Korea (Asia and Pacific)
Language: English
File Type: Documents
Original Format: pdf
Subject: Economy; Macroeconomics
Holding: KDI School of Public Policy and Management
Problem 1
Problem 2 (two screen shots)
Problem 3 (two screen shots)
Problem 4 (three screen shots)
Problem 5 (one screen shot)
Problem 6 (six screenshots plus a data table)
.
Problem 20-1A Production cost flow and measurement; journal entrie.docxChantellPantoja184
Problem 20-1A Production cost flow and measurement; journal entries L.O. P1, P2, P3, P4
[The following information applies to the questions displayed below.]
Edison Company manufactures wool blankets and accounts for product costs using process costing. The following information is available regarding its May inventories.
Beginning
Inventory
Ending
Inventory
Raw materials inventory
$
60,000
$
41,000
Goods in process inventory
449,000
521,500
Finished goods inventory
610,000
342,001
The following additional information describes the company's production activities for May.
Raw materials purchases (on credit)
$
250,000
Factory payroll cost (paid in cash)
1,850,300
Other overhead cost (Other Accounts credited)
82,000
Materials used
Direct
$
200,500
Indirect
50,000
Labor used
Direct
$
1,060,300
Indirect
790,000
Overhead rate as a percent of direct labor
115
%
Sales (on credit)
$
3,000,000
The predetermined overhead rate was computed at the beginning of the year as 115% of direct labor cost.
\\\\\
rev: 11_02_2011
references
1.
value:
2.00 points
Problem 20-1A Part 1
Required:
1(a)
Compute the cost of products transferred from production to finished goods. (Omit the "$" sign in your response.)
Cost of products transferred
$
1(b)
Compute the cost of goods sold. (Omit the "$" sign in your response.)
Cost of goods sold
$
rev: 10_31_2011
check my workeBook Links (4)references
2.
value:
5.00 points
Problem 20-1A Part 2
2(a)
Prepare journal entry dated May 31 to record the raw materials purchases. (Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
May 31
2(b)
Prepare journal entry dated May 31 to record the direct materials usage. (Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
May 31
2(c)
Prepare journal entry dated May 31 to record the indirect materials usage. (Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
May 31
2(d)
Prepare journal entry dated May 31 to record the payroll costs. (Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
May 31
2(e)
Prepare journal entry dated May 31 to record the direct labor costs. (Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
May 31
2(f)
Prepare journal entry dated May 31 to record the indirect labor costs. (Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
May 31
2(g)
Prepare journal entry dated May 31 to record the other overhead costs. (Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
May 31
2(h)
Prepare journal entry dated May 31 to record the overhead applied. (Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
May 31
2(i)
Prepare journal entry dated May 31 to record the goods transferred from production to finished goods.(Omit the "$" sign in yo.
MACROECONOMIC FOCUS AND INDUSTRY ANALYSIS .docxsmile790243
MACROECONOMIC FOCUS AND INDUSTRY ANALYSIS 1
MACROECONOMIC FOCUS AND INDUSTRY ANALYSIS 2
Milestone Two
Macroeconomic Focus and Industry Analysis
NOTE: highlighted any change you made. Know which one is revised. Thanks.
Note: See all highlighted on yellow comments and revised it.THANKS.
Macroeconomic Focus and Industry Analysis
Macroeconomic forecast of the monetary school of thought.
From a monetarist perspective, regulation of the flow and circulation of money is important in determining and influencing preferred economic conditions in the United States. Reducing the circulation of money in the economy has many effects on the macroeconomic environment and determines the activities of other stakeholders in the financial market. From a monetarist school of thought, the government has sole responsibility to both country and citizens in ensuring favorable monetary policies are implemented that are akin to the prevailing economic conditions through the control of inflation and prevention of deflation in the country (Fair, 2011).
Reducing the supply of money in the economy has effects on the macro-economic Cory Kanth:
This point is not clear. It needs clarification in terms of better explanation.
environment as earlier mentioned. Reducing money circulation has both short run and a long run effect that shift practices in the economic environment. For instance, consumer spending is affected by the implementation of monetary policies. When the government implements monetary policies that do not favor money circulation, consumer spending capabilities are significantly reduced (Fair, 2011). The reduction in the spending is due to the reduced flow of money in the financial market which limits the funds accessible to consumers in the market. This policy is usually exercised in a bid to control inflation in the market where prices go up due to increased demand catalyzed by the availability of money in the hands of the spenders.
Reducing the growth of money circulation from a monetary perspective is empirical in determining the cost of labor. When there is a circulation of money in the market, individuals can opt for willing unemployment due to the availability of funds through other sources other than the low paying jobs (Gnimassoun & Mignon, 2015). Further analysis on the effect of reducing money circulation is the government stabilizes the prices of labor meaning little choice is left for personnel who may discriminate employment due to reduced wages or low salaries.
Investment spending is a factor directly affected by the increase in interest rates. This is because investors avoid high lending rates due to high interests that are amassed over operational periods. Moreover, increased lending rates affect investment spending since capital and ...
Navigating Economic Uncertainty: A Strategic Approach to Informed InvestmentsAstute Connect
Navigating Economic Uncertainty: A Strategic Approach to Informed Investments" offers a concise guide to managing investments amidst unpredictable economic landscapes. The focus is on adopting a strategic mindset to make well-informed financial decisions in the face of economic uncertainty. The summary emphasizes the importance of strategic planning and informed investment choices as essential tools for individuals and businesses seeking stability and growth in turbulent economic times.
Present study questions the role of monetary policy in general and inflation targeting in particular with the help of important issues related to it and concludes that it is high time for a change. An irony of the inflation targeting is that price stability has amazingly been achieved in Canada simultaneously with an over-leveraged financial system and an over-exposed economy to the debt and assets. And also, the low policy rate regime under the framework has not been able to stop the investment from decline and the real economy from stagnation.
Non-monetary effects Employee performance during Financial Crises in the Kurd...AI Publications
The crisis of 2014-2018 has focused attention on money and credit fluctuations, financial crises, and policy responses. The main aim of this research was to examine the non-monetary factors affecting employee performance in Kurdistan region of Iraq as general and Erbil as particular. However, the researcher developed five research hypotheses to be tested and measured to evaluate employee performance during financial crises. The researcher implemented simple regression analysis to measure the developed research hypotheses, it was found that the highest value was for job security, this indicates the job security has the most powerful and positive association with employee performance during financial crisis, on the other hand the least powerful was found to be job enrichment that influences and related to employee performance during financial crisis in Kurdistan region of Iraq.
QUALITY ASSURANCE FOR ECONOMY CLASSIFICATION BASED ON DATA MINING TECHNIQUESIJDKP
Researchers in the quality assurance field used traditional techniques for increasing the organization income and take the most suitable decisions. Today they focus and search for a new intelligent techniques in order to enhance the quality of their decisions. This paper based on applying the most robust trend in computer science field which is data mining in the quality assurance field. The cases study which is discussed in this paper based on detecting and predicting the developed and developing countries based on the indicators. This paper uses three different artificial intelligent techniques namely; Artificial Neural Network (ANN), k-Nearest Neighbor (KNN), and Fuzzy k-Nearest Neighbor (FKNN). The main target of this paper is to merge between the last intelligent techniques applied in the computer science with the quality assurance approaches. The experimental result shows that proposed approaches in this paper achieved the highest accuracy score than the other comparative studies as indicates in the experimental result section.
Financialization, Rentier Interests, and Central Bank PolicyConor McCabe
Financialization, Rentier Interests, and Central Bank Policy
Gerald Epstein
Department of Economics and Political Economy Research Institute (PERI)
University of Massachusetts, Amherst
December, 2001; this version, June, 2002
Global Financial Crisis and its impact on economic growthKruti Kamdar
What is Financial Crisis?
Definition: A situation in which the supply of money is outpaced by the demand for money.
This means that liquidity is quickly evaporated because available money is withdrawn from banks, forcing banks either to sell other investments to make up for the shortfall or to collapse. A financial crisis is often associated with a panic or a run on the banks, in which investors sell off assets or withdraw money from savings accounts with the expectation that the value of those assets will drop if they remain at a financial institution...
Rania Al-Mashat - Minister of Tourism
ERF 24th Annual Conference
The New Normal in the Global Economy: Challenges & Prospects for MENA
July 8-10, 2018
Cairo, Egypt
Foreign Exchange Intervention and Currency Crisis (The Case of Korea During P...K Developedia
Title: Foreign exchange intervention and currency crisis
Sub Title: The case of Korea during pre-crisis period
Material Type: Report
Author: Kang, Sung-Kyung
Publisher: KDI School of Public Policy and Management
Date: 2000
Pages: 69
Subject Country: South Korea (Asia and Pacific)
Language: English
File Type: Documents
Original Format: pdf
Subject: Economy; Macroeconomics
Holding: KDI School of Public Policy and Management
Problem 1
Problem 2 (two screen shots)
Problem 3 (two screen shots)
Problem 4 (three screen shots)
Problem 5 (one screen shot)
Problem 6 (six screenshots plus a data table)
.
Problem 20-1A Production cost flow and measurement; journal entrie.docxChantellPantoja184
Problem 20-1A Production cost flow and measurement; journal entries L.O. P1, P2, P3, P4
[The following information applies to the questions displayed below.]
Edison Company manufactures wool blankets and accounts for product costs using process costing. The following information is available regarding its May inventories.
Beginning
Inventory
Ending
Inventory
Raw materials inventory
$
60,000
$
41,000
Goods in process inventory
449,000
521,500
Finished goods inventory
610,000
342,001
The following additional information describes the company's production activities for May.
Raw materials purchases (on credit)
$
250,000
Factory payroll cost (paid in cash)
1,850,300
Other overhead cost (Other Accounts credited)
82,000
Materials used
Direct
$
200,500
Indirect
50,000
Labor used
Direct
$
1,060,300
Indirect
790,000
Overhead rate as a percent of direct labor
115
%
Sales (on credit)
$
3,000,000
The predetermined overhead rate was computed at the beginning of the year as 115% of direct labor cost.
\\\\\
rev: 11_02_2011
references
1.
value:
2.00 points
Problem 20-1A Part 1
Required:
1(a)
Compute the cost of products transferred from production to finished goods. (Omit the "$" sign in your response.)
Cost of products transferred
$
1(b)
Compute the cost of goods sold. (Omit the "$" sign in your response.)
Cost of goods sold
$
rev: 10_31_2011
check my workeBook Links (4)references
2.
value:
5.00 points
Problem 20-1A Part 2
2(a)
Prepare journal entry dated May 31 to record the raw materials purchases. (Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
May 31
2(b)
Prepare journal entry dated May 31 to record the direct materials usage. (Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
May 31
2(c)
Prepare journal entry dated May 31 to record the indirect materials usage. (Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
May 31
2(d)
Prepare journal entry dated May 31 to record the payroll costs. (Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
May 31
2(e)
Prepare journal entry dated May 31 to record the direct labor costs. (Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
May 31
2(f)
Prepare journal entry dated May 31 to record the indirect labor costs. (Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
May 31
2(g)
Prepare journal entry dated May 31 to record the other overhead costs. (Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
May 31
2(h)
Prepare journal entry dated May 31 to record the overhead applied. (Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
May 31
2(i)
Prepare journal entry dated May 31 to record the goods transferred from production to finished goods.(Omit the "$" sign in yo.
Problem 2 Obtain Io.Let x be the current through j2, ..docxChantellPantoja184
Problem 2: Obtain Io.
Let x be the current through j2, .
Let .
.
.
.
………..1.
…………2.
.
.
…………3.
……………….4.
Solving these 4 equations we can get .
.
Problem 1:Find currents I1, I2, and I3
Problem 2: Obtain Io
Problem 3:Obtain io
.
Problem 1On April 1, 20X4, Rojas purchased land by giving $100,000.docxChantellPantoja184
Problem 1On April 1, 20X4, Rojas purchased land by giving $100,000 in cash and executing a $400,000 note payable to the former owner. The note bears interest at 10% per annum, with interest being payable annually on March 31 of each year. Rojas is also required to make a $100,000 payment toward the note's principal on every March 31.(a)Prepare the appropriate journal entry to record the land purchase on April 1, 20X4.(b)Prepare the appropriate journal entry to record the year-end interest accrual on December 31, 20X4.(c)Prepare the appropriate journal entry to record the payment of interest and principal on March 31, 20X5.(d)Prepare the appropriate journal entry to record the year-end interest accrual on December 31, 20X5.(e)Prepare the appropriate journal entry to record the payment of interest and principal on March 31, 20X6.
&R&"Myriad Web Pro,Bold"&20B-13.01
B-13.01
Worksheet 1(a), (b), (c), (d), (e)GENERAL JOURNALDateAccountsDebitCredit04-01-X412-31-X403-31-X512-31-X503-31-X6
&L&"Myriad Web Pro,Bold"&12Name:
Date: Section: &R&"Myriad Web Pro,Bold"&20B-13.01
B-13.01
Problem 2Ace Brick company issued $100,000 of 5-year bonds. The bonds were issued at par on January 1, 20X1, and bear interest at a rate of 8% per annum, payable semiannually.(a)Prepare the journal entry to record the bond issue on January, 20X1.(b)Prepare the journal entry that Ace would record on each interest date.(c)Prepare the journal entry that Ace would record at maturity of the bonds.
&R&"Myriad Web Pro,Bold"&20B-13.06
B-13.06
Worksheet 2(a)(b)(c)GENERAL JOURNAL DateAccountsDebitCreditIssueInterestMaturity
&L&"Myriad Web Pro,Bold"&12Name:
Date: Section: &R&"Myriad Web Pro,Bold"&20B-13.06
B-13.06
Problem 3Erik Food Supply Company issued $100,000 of face amount of 4-year bonds on January 1, 20X1. The bonds were issued at 98, and bear interest at a stated rate of 8% per annum, payable semiannually. The discount is amortized by the straight-line method.(a)Prepare the journal entry to record the initial issuance on January, 20X1.(b)Prepare the journal entry that Erik would record on each interest date.(c)Prepare the journal entry that Erik would record at maturity of the bonds.
&R&"Myriad Web Pro,Bold"&20B-13.08
B-13.08
Worksheet 3(a)(b)(c)GENERAL JOURNAL DateAccountsDebitCreditIssueInterestMaturity
&L&"Myriad Web Pro,Bold"&12Name:
Date: Section: &R&"Myriad Web Pro,Bold"&20B-13.08
B-13.08
Problem 4Horton Micro Chip Company issued $100,000 of face amount of 6-year bonds on January 1, 20X1. The bonds were issed at 103, and bear interest at a stated rate of 8% per annum, payable semiannually. The premium is amortized by the straight-line method.(a)Prepare the journal entry to record the initial issue on January, 20X1.(b)Prepare the journal entry that Horton would record on each interest date.(c)Prepare the journal entry that Horton would record at maturity of the bonds.
&R&"Myriad We.
Problem 17-1 Dividends and Taxes [LO2]Dark Day, Inc., has declar.docxChantellPantoja184
Problem 17-1 Dividends and Taxes [LO2]
Dark Day, Inc., has declared a $5.60 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. Dark Day sells for $94.10 per share, and the stock is about to go ex-dividend.
What do you think the ex-dividend price will be? (Round your answer to 2 decimal places. (e.g., 32.16))
Ex-dividend price
$
Problem 17-2 Stock Dividends [LO3]
The owners’ equity accounts for Alexander International are shown here:
Common stock ($0.60 par value)
$
45,000
Capital surplus
340,000
Retained earnings
748,120
Total owners’ equity
$
1,133,120
a-1
If Alexander stock currently sells for $30 per share and a 10 percent stock dividend is declared, how many new shares will be distributed?
New shares issued
a-2
Show how the equity accounts would change.
Common stock
$
Capital surplus
Retained earnings
Total owners’ equity
$
b-1
If instead Alexander declared a 20 percent stock dividend, how many new shares will be distributed?
New shares issued
b-2
Show how the equity accounts would change. (Negative amount should be indicated by a minus sign.)
Common stock
$
Capital surplus
Retained earnings
Total owners’ equity
$
Problem 17-3 Stock Splits [LO3]
The owners' equity accounts for Alexander International are shown here.
Common stock ($0.50 par value)
$
35,000
Capital surplus
320,000
Retained earnings
708,120
Total owners’ equity
$
1,063,120
a-1
If Alexander declares a five-for-one stock split, how many shares are outstanding now?
New shares outstanding
a-2
What is the new par value per share? (Round your answer to 3 decimal places. (e.g., 32.161))
New par value
$ per share
b-1
If Alexander declares a one-for-seven reverse stock split, how many shares are outstanding now?
New shares outstanding
b-2
What is the new par value per share? (Round your answer to 2 decimal places. (e.g., 32.16))
New par value
$ per share
Problem 17-4 Stock Splits and Stock Dividends [LO3]
Red Rocks Corporation (RRC) currently has 485,000 shares of stock outstanding that sell for $40 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:
a.
RRC has a four-for-three stock split? (Round your answer to 2 decimal places. (e.g., 32.16))
New share price
$
b.
RRC has a 15 percent stock dividend? (Round your answer to 2 decimal places. (e.g., 32.16))
New share price
$
c.
RRC has a 54.5 percent stock dividend? (Round your answer to 2 decimal places. (e.g., 32.16))
New share price
$
d.
RRC has a two-for-seven reverse stock split? (Round your answer to 2 decimal places. (e.g., 32.16))
New share price
$
Determine the new number of shares outstanding in parts (a) through (d).
a.
New shares outstanding
b.
New shares o.
Problem 1Problem 1 - Constant-Growth Common StockWhat is the value.docxChantellPantoja184
Problem 1Problem 1 - Constant-Growth Common StockWhat is the value of a common stock if the firm's earnings and dividends are growing annually at 10%, the current dividend is $1.32,and investors require a 15% return on investment?What is the stock's rate of return if the market price of the stock is $35?
Problem 2Problem 2 - Preferred Stock Price and ReturnA firm has preferred stock outstanding with a $1,000 par value and a $40 annual dividend with no maturity. If the required rate of return is 9%, what is the price of the preferred stock?The market price of a firm's preferred stock is $24 and pays an annual dividend of $2.50. If the stock's par value is $1,000 and it has no maturity, what is the return on the preferred stock?
Problem 3Problem 3 - Bond Valuation and YieldA bond has a par value of $1,000, pays $50 semiannually and has a maturity of 10 years.If the bond earns 12% per year, what is the price of the bond?RateNperPMTFVTypePVWhat is the yield to maturity for the bond?NperPMTPVFVTypeRateWhat would be the bond's price if the rate earned declined to 8% per year?RateNperPMTFVTypePVIf the maturity period is reduced to 5 years and the required rate of return is 8%, what would be the price of the bond?RateNperPMTFVTypePVWhat is the yield to maturity for the bond when the maturity is 5 years and the required rate of return is 8%?NperPMTPVFVTypeRateWhat generalizations about bond prices, interest rates and maturity periods can be made based on the calculations made above?
Problem 4Problem 4 - Callable BondsThe following bonds have a par value of $1,000 and the required rate of return is 10%.Bond XY: 5¼ percent coupon, with interest paid annually for 20 yearsBond AB: 14 percent coupon, with interest paid annually for 20 yearsWhat is each bond's current market price?Bond XYBond ABRateNperPMTFVTypePVIf current interest rates are 9%, which bond would you expect to be called? Explain.
Exercise 10-5
During the month of March, Olinger Company’s employees earned wages of $69,500. Withholdings related to these wages were $5,317 for Social Security (FICA), $8,145 for federal income tax, $3,366 for state income tax, and $434 for union dues. The company incurred no cost related to these earnings for federal unemployment tax but incurred $760 for state unemployment tax.
Prepare the necessary March 31 journal entry to record salaries and wages expense and salaries and wages payable. Assume that wages earned during March will be paid during April. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
Debit
Credit
Mar. 31
SHOW LIST OF ACCOUNTS
LINK TO TEXT
Prepare the entry to record the company’s payroll tax expense. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
Debit
Credit
Mar. 31
===========================================
E.
Problem 1Prescott, Inc., manufactures bookcases and uses an activi.docxChantellPantoja184
Problem 1Prescott, Inc., manufactures bookcases and uses an activity-based costing system. Prescott's activity areas and related data follows:ActivityBudgeted Cost
of ActivityAllocation BaseCost Allocation
RateMaterials handling$230,000Number of parts$0.50Assembly3,200,000Direct labor hours16.00Finishing180,000Number of finished
units4.50Prescott produced two styles of bookcases in October: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct
materials costs, and other data follow:ProductTotal Units
ProducedTotal Direct
Materials CostsTotal Direct
Labor CostsTotal Number
of PartsTotal Assembling
Direct Labor HoursStandard bookcase3,000$36,000$45,0009,0004,500Unfinished bookcase3,50035,00035,0007,0003,500Requirements:1. Compute the manufacturing product cost per unit of each type of bookcase.2. Suppose that pre-manufacturing activities, such as product design, were assigned to the standard bookcases at $7 each, and to the unfinished bookcases at $2 each. Similar analyses
were conducted of post-manufacturing activities such as distribution, marketing, and customer service. The post-manufacturing costs were $22 per standard bookcase and $14 per
unfinished bookcase. Compute the full product costs per unit.3. Which product costs are reported in the external financial statements? Which costs are used for management decision making? Explain the difference.4. What price should Prescott's managers set for unfinished bookcases to earn $15 per bookcase?
Problem 2Corbertt Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health-care facilities
and travel packs of 20 capsules to shops in airports, train stations, and hotels. The following information has been developed to determine if an activity-based costing system
would be beneficial:ActivityEstimated Indirect Activity
CostsAllocation BaseEstimated Quantity of
Allocation BaseMaterials handling$95,000Kilos19,000 kilosPackaging219,000Machine hours5,475 hoursQuality assurance124,500Samples2,075 samplesTotal indirect costs$438,500Other production information includes the following:Commercial ContainersTravel PacksUnits produced3,500 containers57,000 packsWeight in kilos14,0005,700Machine hours2,625570Number of samples700855Requirements:1. Compute the cost allocation rate for each activity.2. Use the activity-based cost allocation rates to compute the activity costs per unit of the commercial containers and the travel packs. (Hint: First compute the total activity
cost allocated to each product line, and then compute the cost per unit.)3. Corbertt's original single-allocation-base costing system allocated indirect costs to produce at $157 per machine hour. Compute the total indirect costs allocated to the
commercial containers and to the travel packs under the original system. Then compute the indirect cost per unit for ea.
Problem 1Preston Recliners manufactures leather recliners and uses.docxChantellPantoja184
Problem 1Preston Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. Preston allocates overhead based on yards of direct materials. The company's performance report includes the following selected data:Static Budget
(1,000 recliners)Actual Results
(980 recliners)Sales (1,000 recliners X $495)$495,000 (980 recliners X $475)$465,500Variable manufacturing costs: Direct materials (6,000 yds @ $8.80/yard)52,800 (6,150 yds @ $8.60/yard)52,890 Direct labor (10,000 hrs @ $9.20/hour)92,000 (9,600 hrs @ $9.30/hour)89,280Variable overhead (6,000 yds @ $5.00/yard)30,000 (6,510 yds @ $6.40/yard)39,360Fixed manufacturing costs: Fixed overhead60,00062,000Total cost of goods sold$234,800$243,530Gross profit$260,200$221,970Requirements:1. Prepare a flexible budget based on the actual number of recliners sold.2. Compute the price variance and the efficiency variance for direct materials and for direct labor. For manufacturing overhead, compute the variable overhead spending, variable overhead efficiency, fixed overhead spending, and fixed overhead volume variances.3. Have Preston's managers done a good job or a poor job controlling materials, labor, and overhead costs? Why?4. Describe how Preston's managers can benefit from the standard costing system.
Problem 2AllTalk Technologies manufactures capacitors for cellular base stations and other communications applications. The company's January 2012 flexible budget income statement shows output levels of 6,500, 8,000, and 10,000 units. The static budget was based on expected sales of 8,000 units.ALLTALK TECHNOLOGIES
Flexible Budget Income Statement
Month Ended January 31, 2012Per UnitBy Units (Capacitors)6,5008,00010,000Sales revenue$24$156,000$192,000$240,000Variable expenses$1065,00080,000100,000Contribution margin$91,000$112,000$140,000Fixed expenses53,00053,00053,000Operating income$38,000$59,000$87,000The company sold 10,000 units during January, and its actual operating income was as follows:ALLTALK TECHNOLOGIES
Income Statement
Month Ended January 31, 2012Sales revenue$246,000Variable expenses104,500Contribution margin$141,500Fixed expenses54,000Operating income$87,500Requirements:1. Prepare an income statement performance report for January.2. What was the effect on AllTalk's operating income of selling 2,000 units more than the static budget level of sales?3. What is AllTalk's static budget variance? Explain why the income statement performance report provides more useful information to AllTalk's managers than the simple static budget variance. What insights can AllTalk's managers draw from this performance report?
Problem 3Java manufacturers coffee mugs that it sells to other companies for customizing with their own logos. Java prepares flexible budgets and uses a standard cost system to control manufacturing costs. The standard unit.
Problem 1Pro Forma Income Statement and Balance SheetBelow is the .docxChantellPantoja184
Problem 1Pro Forma Income Statement and Balance SheetBelow is the income statement and balance sheet for Blue Bill Corporation for 2013. Based on the historical statements and theadditional information provided, construct the firm's pro forma income statement and balance sheet for 2014.Blue Bill CorporationIncome StatementFor the year ended 2013Projected201220132014Revenue$60,000$63,000Cost of goods sold42,00044,100Gross margin18,00018,900SG&A expense6,0006,300Depreciation expense1,8002,000Earnings Before Interest and Taxes (EBIT)10,20010,600Interest expense1,5001,800Taxable income8,7008,800Income Tax Expense3,0453,080Net income5,6555,720Dividends750800To retained earnings$4,905$4,920Additional income statement information:Sales will increase by 5% in 2014 from 2013 levels.COGS and SG&A will be the average percent of sales for the last 2 years.Depreciation expense will increase to $2,200.Interest expense will be $1,900.The tax rate is 35%.Dividend payout will increase to $850.Blue Bill CorporationBalance SheetDecember 31, 2013Projected20132014Current assetsCash$8,000Accounts receivable3,150Inventory9,450Total current assets20,600Property, plant, and equipment (PP&E)28,500Accumulated depreciation16,400Net PP&E12,100Total assets$32,700Current liabilitesAccounts payable$3,780Bank loan (10%)3,200Other current liabilities1,250Total current liabilities8,230Long-term debt (12%)4,800Common stock1,250Retained earnings18,420Total liabilities and equity$32,700Additional balance sheet information:The minimum cash balance is 12% of sales.Working capital accounts (accounts receivable, accounts payable, and inventory) will be the same percent of sales in 2014 as they were in 2013.$8,350 of new PP&E will be purchased in 2014.Other current liabilities will be 3% of sales in 2014.There will be no changes in the common stock or long-term debt accounts.The plug figure (the last number entered that makes the balance sheet balance) is bank loan.
1
Rough Draft
Rough Draft
Rasmussen College
Metro Dental Care is a dental office that provides affordable, convenient, and high quality of care to patients. As a patient at Metro, I personally believe that Metro Dental Care is one of the best dental clinics around, and that’s why I have chosen this company. Metro Dental Care measures their results by recording patient satisfaction.
Managing financial reports, and the quality of service they provide to their customers. Furthermore, the dentists and staff at Metro Dental Care know how important your smile is. Their mission statement states “We pride ourselves in making your smile look great so you not only look good, but feel confident with your smile.”
Metro Dental Care offers convenience for their patients with more than 40 offices throughout the Minneapolis and St. Paul metro area offering flexible hours including early morning, evening and Saturday appointments. Whether you work or live Metro Dental Care has a location near you. Metro Dental .
PROBLEM 14-6AProblem 14-6A Norwoods Borrowings1. Total amount of .docxChantellPantoja184
PROBLEM 14-6AProblem 14-6A: Norwoods Borrowings1. Total amount of each installment payment.Present value of an ordinary annuity$200,000Interest per period(i)0.08Number of periods(n)5Total amount of each installment payment($50,091.29)Therefore the total amount of each installment payment is $ 50,091.292.Norwoods Amortization TablePeriod Ending DateBeginning balance Interest expenseNotes PayableCash paymentEnding Balance10/31/15$200,000.00$16,000.00$34,091.29$50,091.29$165,908.7110/31/16$165,909.00$13,272.72$36,818.57$50,091.29$129,090.4310/31/17$129,090.43$10,327.23$39,764.06$50,091.29$89,326.3710/31/18$89,326.37$7,146.11$42,945.18$50,091.29$46,381.1910/31/19$46,381.19$3,710.50$46,380.79$50,091.29$0.403.a) Accrued interest as December 31st 2015Accrued interest expense = $200,000*8%*2/12= $2,666.67. Thus the journal entry is as shown below:DescriptionDr($)Cr($)interest expense $2,666.67 Interest payable $2,666.67b) The first annual payment on the note.Ten more months of interest has accrued $200,000*8%*10/12 =$13,333.33 accrued interest .Therefore the journal entry is as shown below:DescriptionDr($)Cr($)Notes payable$34,091.29interest expense$13,333.33interest payable$2,666.67 Cash$50,091.29
PROBLEM 14-7AProblem 14-7AQuestion 1a) Debt to equity ratiosPulaski CompanyScott Company Total liabilities$360,000.00$240,000.00Total Equity$500,000.00$200,000.00Debt-Equity Ratio0.721.2Question 2The debt to equity ratio measures the amount of debt a company uses has to finance its business for every dollar of equity it has. A higher debt to equity ratio implies that a company uses more debt than equity for financing. In this case, the debt to equity ratio for Pulaski Company is 0.72 which is less than 1 implying that the stockholder's equity exceeds the amount of debt borrowed. Thus Pulaski Company may not likely suffer from risks brought about by huge amount of debts in the capital structure. On the other hand, the debt to equity ratio of Scott Company is 1.2 which is greater than 1 implying that the debt exceeds the totalamount stockholders equity. Huge debts is associated with a lot of risks. First, there is the risk of defaulting whereby the company may be unable to repay its debt and therefore leading to bankruptcy. Second, a company may find it difficult to obtain additional funding from creditors.This is because the creditors prefer companies with low debt to equity ratio. Finally, there is the risks of violating the debt covenants. A covenant is an agreement that requires a company to maintain adequate financial ratio levels. Too much borrowings may violate this covenant. Since ScottCompany has a higher debt to equity ratio, it may experience these risks which may eventually lead to the company being declared bankrupt .
PROBLEM 14-6BProblem 14-6B: Gordon Enterprises Borrowings1. Total amount of each installment payment.Present value of an ordi.
Problem 13-3AThe stockholders’ equity accounts of Ashley Corpo.docxChantellPantoja184
Problem 13-3A
The stockholders’ equity accounts of Ashley Corporation on January 1, 2012, were as follows.
Preferred Stock (8%, $49 par, cumulative, 10,200 shares authorized)
$ 387,100
Common Stock ($1 stated value, 1,937,100 shares authorized)
1,408,700
Paid-in Capital in Excess of Par—Preferred Stock
123,200
Paid-in Capital in Excess of Stated Value—Common Stock
1,496,800
Retained Earnings
1,814,400
Treasury Stock (10,300 common shares)
51,500
During 2012, the corporation had the following transactions and events pertaining to its stockholders’ equity.
Feb. 1
Issued 24,100 shares of common stock for $123,900.
Apr. 14
Sold 6,000 shares of treasury stock—common for $33,800.
Sept. 3
Issued 5,100 shares of common stock for a patent valued at $35,700.
Nov. 10
Purchased 1,100 shares of common stock for the treasury at a cost of $5,700.
Dec. 31
Determined that net income for the year was $456,600.
No dividends were declared during the year.
(a)
Journalize the transactions and the closing entry for net income. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
Debit
Credit
Feb. 1
Apr. 14
Sept. 3
Nov. 10
Dec. 31
Click if you would like to Show Work for this question:
Open Show Work
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Problem 12-9AYour answer is partially correct. Try again..docxChantellPantoja184
Problem 12-9A
Your answer is partially correct. Try again.
Condensed financial data of Odgers Inc. follow.
ODGERS INC.Comparative Balance Sheets
December 31
Assets
2014
2013
Cash
$ 131,704
$ 78,892
Accounts receivable
143,114
61,940
Inventory
183,375
167,646
Prepaid expenses
46,292
42,380
Long-term investments
224,940
177,670
Plant assets
464,550
395,275
Accumulated depreciation
(81,500
)
(84,760
)
Total
$1,112,475
$839,043
Liabilities and Stockholders’ Equity
Accounts payable
$ 166,260
$ 109,699
Accrued expenses payable
26,895
34,230
Bonds payable
179,300
237,980
Common stock
358,600
285,250
Retained earnings
381,420
171,884
Total
$1,112,475
$839,043
ODGERS INC.Income Statement Data
For the Year Ended December 31, 2014
Sales revenue
$633,190
Less:
Cost of goods sold
$220,800
Operating expenses, excluding depreciation
20,228
Depreciation expense
75,795
Income tax expense
44,466
Interest expense
7,710
Loss on disposal of plant assets
12,225
381,224
Net income
$ 251,966
Additional information:
1.
New plant assets costing $163,000 were purchased for cash during the year.
2.
Old plant assets having an original cost of $93,725 and accumulated depreciation of $79,055 were sold for $2,445 cash.
3.
Bonds payable matured and were paid off at face value for cash.
4.
A cash dividend of $42,430 was declared and paid during the year.
Prepare a statement of cash flows using the indirect method. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)
ODGERS INC.Statement of Cash Flows
For the Year Ended December 31, 2014
$
Adjustments to reconcile net income to
$
$
Problem 12-10A
Condensed financial data of Odgers Inc. follow.
ODGERS INC.Comparative Balance Sheets
December 31
Assets
2014
2013
Cash
$ 151,904
$ 90,992
Accounts receivable
165,064
71,440
Inventory
211,500
193,358
Prepaid expenses
53,392
48,880
Long-term investments
259,440
204,920
Plant assets
535,800
455,900
Accumulated depreciation
(94,000
)
(97,760
)
Total
$1,283,100
$967,730
Liabilities and Stockholders’ Equity
Accounts payable
$ 191,760
$ 126,524
Accrued expenses payable
31,020
39,480
Bonds payable
206,800
274,480
Common stock
413,600
329,000
Retained earnings
439,920
198,246
Total
$1,283,100
$967,730
ODGERS INC.Income Statement Data
For the Year Ended December 31, 2014
Sales revenue
$730,305
Less:
Cost of goods sold
$254,665
Operating expenses, excluding depreciation
23,331
Depreciation expense
87,420
Income taxes
51,286
Interest expense
8,892
Loss on disposal of plant assets
14,100
439,694
Net income
$ 290,611
Additional information:
1.
New plant assets costing $188,000 were purchased for c.
Problem 1123456Xf122437455763715813910106Name DateTopic.docxChantellPantoja184
Problem 1123456Xf122437455763715813910106
Name: Date:
Topic One: Mean, Variance, and Standard Deviation
Please type your answer in the cell beside the question.
5. The following is the heart rate for 10 randomly selected patients on the unit. Find the mean, variance, and standard deviation of the data using the descriptive statistics option in the data analysis toolpak.
75, 80, 62, 97, 107, 59, 76, 83, 84, 69
6. The following is a frequency distribution fo the number of times patience use the call light in a days time. X is the number of times the call light is used and f is the frequency (meaning the number of patients). Create a histogram of the data.
Sheet2
Sheet3
EXERCISE 11 USING STATISTICS TO DESCRIBE A STUDY SAMPLE
STATISTICAL TECHNIQUE IN REVIEW
Most studies describe the subjects that comprise the study sample. This description of the sample is called the sample characteristics which may be presented in a table or the narrative of the article. The sample characteristics are often presented for each of the groups in a study (i.e. experimental and control groups). Descriptive statistics are used to generate sample characteristics, and the type of statistic used depends on the level of measurement of the demographic variables included in a study (Burns & Grove, 2007). For example, measuring gender produces nominal level data that can be described using frequencies, percentages, and mode. Measuring educational level usually produces ordinal data that can be described using frequencies, percentages, mode, median, and range. Obtaining each subject's specific age is an example of ratio data that can be described using mean, range, and standard deviation. Interval and ratio data are analyzed with the same type of statistics and are usually referred to as interval/ratio level data in this text.
RESEARCH ARTICLE
Source: Troy, N. W., & Dalgas-Pelish, P. (2003). The effectiveness of a self-care intervention for the management of postpartum fatigue. Applied Nursing Research, 16 (1), 38–45.
Introduction
Troy and Dalgas-Pelish (2003) conducted a quasi-experimental study to determine the effectiveness of a self-care intervention (Tiredness Management Guide [TMG]) on postpartum fatigue. The study subjects included 68 primiparous mothers, who were randomly assigned to either the experimental group (32 subjects) or the control group (36 subjects) using a computer program. The results of the study indicated that the TMG was effective in reducing levels of morning postpartum fatigue from the 2nd to 4th weeks postpartum. These researchers recommend that “mothers need to be informed that they will probably experience postpartum fatigue and be taught to assess and manage this phenomenon” (Troy & Dalgas-Pelish, 2003, pp. 44-5).
Relevant Study Results
“A total of 80 women were initially enrolled [in the study] … twelve of these women dropped out of the study resulting in a final sample of 68.” (Troy & Dalgas-Pelish, 2003, p. 39). The researchers presen.
Problem 1. For the truss and loading shown below, calculate th.docxChantellPantoja184
Problem 1. For the truss and loading shown below, calculate the horizontal
displacement of point "D" using the method of virtual work. Show ALL your work!
HW No. 8 - Part 1
Solution
HW FA15 2 Page 1
Problem 1 Continued
Member L (in.) N (lb) N (in) NnL
HW No. 8 - Part 1
.
Problem 1 (30 marks)Review enough information about .docxChantellPantoja184
Problem 1 (30 marks)
Review enough information about Trinidad Drilling Ltd. to propose a vision and strategic objectives for the company. Develop a balanced scorecard that will help the company achieve this vision and monitor how well it is accomplishing its strategic objectives. Include a strategy map in table format that shows objectives and performance measures, with arrows illustrating hypothesized cause-and -effect relationships. Provide rationale for your strategy map. The body of your report should not exceed 1,000 words. Cite material you used to prepare the response and provide references in an appendix.
Problem 2 (20 marks)
Ajax Auto Upholstery Ltd. manufactures upholstered products for automobiles, vans, and trucks. Among the various Ajax plants around Canada is the Owlseye plant located in rural Alberta.
The chief financial officer has just received a report indicating that Ajax could purchase the entire annual output of the Owlseye plant from a foreign supplier for $37 million per year.
The budgeted operating costs (in thousands) for the Owlseye plant’s for the coming year is as follows:
Materials $15,000
Labor
Direct $12,000
Supervision 4,000
Indirect plant 5,000 19,000
Overhead
Depreciation – plant 6,000
Utilities, property tax, maintenance 2,000
Pension expense 4,500
Plant manager and staff 2,500
Corporate headquarters overhead allocation 3,000 18,000
Total budgeted costs $52,000
If material purchase orders are cancelled as a consequence of the plant closing, termination charges would amount to 10 percent of the annual cost of direct materials in the first year (zero thereafter).
A clause in the Ajax union contract requires the company to provide employment assistance to its former employees for 12 months after a plant closes. The estimated cost to administer this service if the Owlseye plant closes would be $2 million. $3.6 million of next year’s pension expense would continue indefinitely whether or not the plant remains open. About $900,000 of labour would still be required in the first year after closure to decommission the plant. After that, the plant would be sold for an estimated $1 million. Utilities, property taxes, and maintenance costs would remain unchanged in the first year after closure, but disappear when the plant is sold.
The plant manager and her staff would be somewhat affected by the closing of the Owlseye plant. Some managers would still be responsible for managing three other plants. As a result, total management salaries would be about 50% of the current level, starting at closure and remaining into the future.
Required:
Assume you are the company’s chief financial officer. Perform a five-year financial analysis and make a recommendation whether to close the Owlseye plant on this basis. Provide support for and cautions about your recommendation with organized, clearly-labeled data. Use bullet points where appropriate.
Problem 3 (16 marks)
Br.
Problem 1 (10 points) Note that an eigenvector cannot be zero.docxChantellPantoja184
Problem 1 (10 points): Note that an eigenvector cannot be zero, but an eigenvalue can
be 0. Suppose that 0 is an eigenvalue of A. What does it say about A? (Hint: One of the
most important properties of a matrix is whether or not it is invertible. Think about the
Invertible Matrix Theorem and all the ‘good things’ of dealing with invertible matrices)
Problem 5: (20 points): The figure below shows a network of one-way streets with
traffic flowing in the directions indicated. The flow rate along the streets are measured
as the average number of vehicles per hour.
a) Set up a mathematical model whose solution provides the unknown flow rates
b) Solve the model for the unknown flow rates
c) If the flow rates along the road A to B must be reduced for construction, what is
the minimum flow that is required to keep traffic flowing on all roads?
Problem 6 (20 points): Problem 7 (9 points): Prove that if A and B are matrices of the same
size, then tr(A+B)=tr(A)+tr(B)
Given:
Goal:
Proof:
Problem 7 (20 points)*: In the 1990, the northern spotted owl became the center of a
nationwide controversy over the use and misuse of the majestic forests in the Pacific
Northwest. Environmentalists convinced the federal government that the owl was
threatened with extinction if logging continued in the old-growth forests (with trees over
200 years old), where the owls prefer to live. The timber industry, anticipating the loss of
30,000 to 100,000 jobs as a result of new government restrictions on logging, argued that
the owl should not be classified as a “threatened species” and cited a number of published
scientific reports to support its case.
Caught in the crossfire of the two lobbying groups, mathematical ecologists
intensified their drive to understand the population dynamics of the spotted owl. The life
cycle of a spotted owl divides naturally into three stages: juvenile (up to 1 year old),
subadult (1 to 2 years), and adult (over 2 years). The owls mate for life during the subadult
and adult stages, begin to breed as adults, and live for up to 20 years. Each owl pair
requires about 1,000 hectares (4 square miles) for its own home territory. A critical time in
the life cycle is when the juveniles leave the nest. To survive and become a subadult, a
juvenile must successfully find a new home range (and usually a mate).
A first step in studying the population dynamics is to model the population at yearly
intervals, at times denoted by 𝑘𝑘 = 0,1,2, …. Usually, one assumes that there is a 1:1 ratio of
males to females in each life stage and counts only the females. The population at year 𝑘𝑘
can be described by a vector 𝒙𝒙𝒌𝒌 = (𝑗𝑗𝑘𝑘 , 𝑠𝑠𝑘𝑘 , 𝑎𝑎𝑘𝑘 ), where 𝑗𝑗𝑘𝑘 , 𝑠𝑠𝑘𝑘 , and 𝑎𝑎𝑘𝑘 are the numbers of
females in the juvenile, subadult, and adult stages, respectively. Using actual field data from
demographic studies, a rese
Probation and Parole 3Running head Probation and Parole.docxChantellPantoja184
Probation and Parole 3
Running head: Probation and Parole
Probation and Parole
Student Name
Allied American University
Author Note
This paper was prepared for Probation and Parole, Module 8 Check Your Understanding taught by [INSERT INSTRUCTOR’S NAME].
Directions: Respond to the following questions using complete sentences. Your answer should be at least 1 paragraph in length, which must be composed of three to five sentences.
1. What is meant by intermediate punishments and what programs are included in this category?
2. How do intermediate punishments serve to keep down prison populations?
3. Why has electronic monitoring proven so popular?
4. What is meant by shock probation/parole?
5. What are the essential features of the boot camp program?
6. Why has intensive supervision been a public relations success?
7. What are the criticisms of boot camp programs?
8. What has research revealed with respect to intensive supervision?
9. What are the criticisms of electronic monitoring in probation and parole?
10. What are the criticisms leveled at intensive supervision?
11. What are the purposes of and services offered by a day reporting center?
12. Why would heroin addicts who have no intention of giving up drug use voluntarily enter a drug treatment program? What are the advantages of using methadone to treat heroin addicts?
13. Why is behavior modification difficult to use in treating drug abusers?
14. What are the characteristics of chemical dependency (CD) programs?
15. What are the primary characteristics of the therapeutic community (TC) approach for treating drug abusers?
16. What are criticisms of the Alcoholics Anonymous approach?
17. What are the problems inherent in drug testing?
18. What are the typical characteristics of sex offenders? How have sex offender laws affected P/P supervision?
19. What are the pros and cons of restitution and charging offenders fees in probation or parole?
20. What are the problems encountered in using the interstate compact?
.
Problem 1(a) Complete the following ANOVA table based on 20 obs.docxChantellPantoja184
Problem 1:
(a) Complete the following ANOVA table based on 20 observations for the regression equation
(a) Is the overall regression significant? Fill in the missing values in the table.
Source DF SS MS F
Regression ___ 350 ____ ____
Error ___ _____
Total 500
(b) Suppose that you have computed the following sequential sums of squares due to regression:
Regressor Variables in Model SS Regression
………………………………………. 300
……………………………………… 250
…………………………………….. 340
……………………………………. 325
Fill in the missing values in the following “computer output”:
Source DF Partial SS F-value Pr>F
……………………………………………………………………………………….. 0.1245
………………………………………………………………………………………. 0.3841
………………………………………………………………………………………. 0.0042
………………………………………………………………………………………. 0.0401
Problem 2:
The time required for a merchandise to stock a grocery store shelf with a soft drink product as well as the number of cases of product stocked are given below. Consider a linear regression of delivery time against number of cases.
X=number of cases
Y=delivery time
Delivery time number of cases Hat diagonals
1.41 4 0.5077
2.96 6 0.3907
6.04 14 0.2013
7.57 19 0.3092
9.38 24 0.5912
Observations used L.S. Model
4,6,14,19,24
6,14,19,24
4,14,19,24
4,14,19,24
4,6,14,24
4,6,14,19
(a)
Calculate the PRESS statistic for the model .
(b) Calculate the regular residual for the model above. Then, compare these residuals with the PRESS residuals for this model.
Exercises from the Text
Use SAS whenever possible to do these exercises:
# 3.4 on p 122
# 3.5
# 3.8
# 3.15
# 3.21
# 3.27
# 3.28
# 3.31
# 3.38
# 3.39
Example with SAS on Sequential and Partial Sum of Squares
Data Weather;
Title 'Lows and Highs from N&O Jan 28,29,30 1992';
Title2 'using actual numbers (yesterday values)';
input city $ hi2 lo2 yhi ylo thi tlo;
* Mon Tues Wed ;
cards;
seattle 51 44 52 44 59 47
.
.
.
;
proc reg; model thi = yhi hi2 tlo ylo lo2/ss1 ss2;
test tlo=0, ylo=0, lo2=0;
/*-----------------------------------------------
| Showing sequential and partial sums of squares|
| Note t**2 = F relationship for partial F. By |
| hand, construct F to leave out .
Probe 140 SPrecipitation in inchesTemperature in F.docxChantellPantoja184
Probe 1
40 S
Precipitation in inches
Temperature in F
J F M A M J J A S O N D
2
4
6
8
10
12
0
10
20
30
40
50
60
70
80
90
POTET 26.8
Precip 27.1
MAT(F) 59.8
Probe 2
6 S
Precipitation in inches
Temperature in F
J F M A M J J A S O N D
2
4
6
8
10
12
0
10
20
30
40
50
60
70
80
90
POTET 69.2
Precip 124.6
MAT(F) 77.9
Probe 3
57 S
Precipitation in inches
Temperature in F
J F M A M J J A S O N D
2
4
6
8
10
12
0
10
20
30
40
50
60
70
80
90
POTET 21.5
Precip 38.7
MAT(F) 43.5
Probe 4
38 N
Precipitation in inches
Temperature in F
J F M A M J J A S O N D
2
4
6
8
10
12
0
10
20
30
40
50
60
70
80
90
POTET 30.3
Precip 16.5
MAT(F) 53.6
Probe 5
55 N
Precipitation in inches
Temperature in F
J F M A M J J A S O N D
2
4
6
8
10
12
0
10
20
30
40
50
60
70
80
90
POTET 21.3
Precip 28.1
MAT(F) 40.6
Probe 6
43 N
Precipitation in inches
Temperature in F
J F M A M J J A S O N D
2
4
6
8
10
12
0
10
20
30
40
50
60
70
80
90
POTET 25.4
Precip 14.4
MAT(F) 47.2
Probe 7
42 N
Precipitation in inches
Temperature in F
J F M A M J J A S O N D
2
4
6
8
10
12
0
10
20
30
40
50
60
70
80
90
POTET 17.3
Precip 31.2
MAT(F) 26.0
Probe 8
42 N
Precipitation in inches
Temperature in F
J F M A M J J A S O N D
2
4
6
8
10
12
0
10
20
30
40
50
60
70
80
90
POTET 29.6
Precip 38.8
MAT(F) 51.6
Probe 9
18 S
Precipitation in inches
Temperature in F
J F M A M J J A S O N D
2
4
6
8
10
12
0
10
20
30
40
50
60
70
80
90
POTET 66.1
Precip 74.8
MAT(F) 77.7
Probe 10
58 N
Precipitation in inches
Temperature in F
J F M A M J J A S O N D
2
4
6
8
10
12
0
10
20
30
40
50
60
70
80
90
POTET 16.5
Precip 24.8
MAT(F) 36.9
Probe 11
26 N
Precipitation in inches
Temperature in F
J F M A M J J A S O N D
2
4
6
8
10
12
0
10
20
30
40
50
60
70
80
90
POTET 47.6
Precip 3.8
MAT(F) 70.1
Probe 12
29 N
Precipitation in inches
Temperature in F
J F M A M J J A S O N D
2
4
6
8
10
12
0
10
20
30
40
50
60
70
80
90
POTET 44.0
Precip 47.3
MAT(F) 63.2
Probe 4
Probe 2
Probe 10
Probe 5
Probe 6
Probe 7
Probe 11
Probe 12
Probe 8
Probe 9
Probe 3
Probe 1
Map 1
20 N
40 N
60 N
80 N
0
20 S
40 S
60 S
0
1000
miles
Geography 204
Koppen Climate Classification Guidelines
If POTET exceeds Precip then B
BW = POTET more than 2x Precip
(desert)
h = mean annual temp > 18 C (64.4 F)
k = mean annual temp < 18 C (64.4 F)
BS = POTET less than 2x Precip
(steppe)
h = mean annual t.
Read| The latest issue of The Challenger is here! We are thrilled to announce that our school paper has qualified for the NATIONAL SCHOOLS PRESS CONFERENCE (NSPC) 2024. Thank you for your unwavering support and trust. Dive into the stories that made us stand out!
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The Roman Empire, a vast and enduring power, stands as one of history's most remarkable civilizations, leaving an indelible imprint on the world. It emerged from the Roman Republic, transitioning into an imperial powerhouse under the leadership of Augustus Caesar in 27 BCE. This transformation marked the beginning of an era defined by unprecedented territorial expansion, architectural marvels, and profound cultural influence.
The empire's roots lie in the city of Rome, founded, according to legend, by Romulus in 753 BCE. Over centuries, Rome evolved from a small settlement to a formidable republic, characterized by a complex political system with elected officials and checks on power. However, internal strife, class conflicts, and military ambitions paved the way for the end of the Republic. Julius Caesar’s dictatorship and subsequent assassination in 44 BCE created a power vacuum, leading to a civil war. Octavian, later Augustus, emerged victorious, heralding the Roman Empire’s birth.
Under Augustus, the empire experienced the Pax Romana, a 200-year period of relative peace and stability. Augustus reformed the military, established efficient administrative systems, and initiated grand construction projects. The empire's borders expanded, encompassing territories from Britain to Egypt and from Spain to the Euphrates. Roman legions, renowned for their discipline and engineering prowess, secured and maintained these vast territories, building roads, fortifications, and cities that facilitated control and integration.
The Roman Empire’s society was hierarchical, with a rigid class system. At the top were the patricians, wealthy elites who held significant political power. Below them were the plebeians, free citizens with limited political influence, and the vast numbers of slaves who formed the backbone of the economy. The family unit was central, governed by the paterfamilias, the male head who held absolute authority.
Culturally, the Romans were eclectic, absorbing and adapting elements from the civilizations they encountered, particularly the Greeks. Roman art, literature, and philosophy reflected this synthesis, creating a rich cultural tapestry. Latin, the Roman language, became the lingua franca of the Western world, influencing numerous modern languages.
Roman architecture and engineering achievements were monumental. They perfected the arch, vault, and dome, constructing enduring structures like the Colosseum, Pantheon, and aqueducts. These engineering marvels not only showcased Roman ingenuity but also served practical purposes, from public entertainment to water supply.
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How to Make a Field invisible in Odoo 17Celine George
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This Gasta posits a strategic approach to integrating AI into HEIs to prepare staff, students and the curriculum for an evolving world and workplace. We will highlight the advantages of working with these technologies beyond the realm of teaching, learning and assessment by considering prompt engineering skills, industry impact, curriculum changes, and the need for staff upskilling. In contrast, not engaging strategically with Generative AI poses risks, including falling behind peers, missed opportunities and failing to ensure our graduates remain employable. The rapid evolution of AI technologies necessitates a proactive and strategic approach if we are to remain relevant.
Macroeconomics- Movie Location
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Objective:
Prepare a presentation or a paper using research, basic comparative analysis, data organization and application of economic information. You will make an informed assessment of an economic climate outside of the United States to accomplish an entertainment industry objective.
2. be reproduced,
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photocopying, recording, or otherwise – without the permission
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CHAPTER 6
Critiques of Monetary Policy
Critiques of Monetary Policy
Fiat money is a relatively new phenomenon. It has been in use
slightly
more than three-quarters of one century. Tus, how historians
will even-
tually evaluate this experiment with fat money is yet to be
determined.
It is probably an understatement to suggest that the U.S.
experience with
this type of money, to this point, has not been an unmitigated
success.
Because fat monies are controlled by governments, what
historians must
eventually assess is how governments have performed.
3. Monetary policy is reasonably transparent and the performance
of
governments as custodians of fat money has not gone unnoticed.
Te
critiques discussed in the next sections are not concerned with
situations
where seigniorage is the principal motive of monetary
authorities. Rather,
the focus is on the practice of discretionary monetary policy in
countries
where macroeconomic management is the driving force behind
policy.
A common thread in critiques of monetary policy is the critical
role that
knowledge plays in the successful implementati on of
discretionary mon-
etary policy. Te critiques that follow demonstrate the multi -
dimensional
nature of the knowledge issue.
One very important kind of knowledge required of central
bankers
is knowledge about the performance of the economy, somethi ng
that is
necessary if monetary authorities are to know whether monetary
ease or
tighter money is the appropriate policy. When knowledge does
exist, it
is not always apparent that central bankers will be in a position
to utilize
that knowledge. Political considerations may interfere. Central
banks are
also expected to understand how the policy they enact is
transmitted to
4. the economy, and how those afected will respond to that policy.
Finally,
it is important for central banks to know what efect, if any, the
infusion
of new money has on relative prices and the allocation of
resources across
markets.
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112 MONEY AND BANKING: AN INTERMEDIATE
MARKET-BASED APPROACH
Friedman: Rules vs. Discretion
Milton Friedman argued that the use of discretionary monetary
policy has
resulted in increased economic instability. Te problem is not
with the use
of fat money. Rather, it is with the procedures employed by
central banks
to implement monetary policy, specifcally the use of
discretionary policy.
Replacing that type of policy with a monetary rule would
greatly reduce
economic uncertainty, especially uncertainty about the future
course of
monetary policy. Tis would provide a much better climate for
produc-
5. tive activity and eliminate much of the economic instability
occasioned
by the use of fat money.
In fashioning this position, Friedman’s posture is diametrically
opposed to those who favor the use of discretionary policy.
Proponents of
discretionary policy maintain that its use can greatly improve
macroeco-
nomic performance. Appropriate application of policy
instruments will
both reduce short-run business cycle fuctuations and bring us
greater
long-run price stability. Monetary stimulation during a
recession, for
example, will shorten the recession. If too much infation is the
problem,
tighter monetary policy is in order.
Friedman’s case against discretionary policy is that those
implement-
ing such policies most often do the wrong thing. Two principal
reasons
for this are: 1) politics, and 2) ignorance. By doing the wrong
thing, those
implementing discretionary policies make economic conditions
worse
rather than better.
Politics
Economic analysis of monetary policy often proceeds as if this
policy were
conducted in a political vacuum. Tat decidedly is not the case.
Monetary
policy is carried out by government, and the political
6. consequences of
a policy action receive careful consideration. What is
considered ratio-
nal policy from a political perspective can difer signifcantly
from that
implied by economic theory. If political considerations
dominate, those
implementing discretionary policy may, with good reason,
deliberately
select the incorrect economic policy.
Political considerations can afect monetary policy even in
countries
(such as the United States) that have a fairly independent
central bank.
When, for example, is a good time for the central bank to
invoke a tighter
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CRITIqUES OF MONETARY POLICY 113
monetary policy that results in higher nominal interest rates?
From a
political perspective, the likely answer is never. As a
consequence, central
bankers bold enough to undertake such policies can expect
politicians
to sharply criticize their actions. Tat may be enough for
policymakers
contemplating such action to reconsider.
7. Elections cycles also create problems for those implementing
discre-
tionary monetary policy. In the absence of political pressure,
introducing
a policy change too close to an election can be interpreted as
politically
motivated. For central bankers in democratic countries who are
sensitive
to such charges, this might inhibit the implementation of an
otherwise
appropriate change in monetary policy.
A second way that election cycles infuence monetary policy is
through
the actions of politicians concerned about an imminent election.
Tey
might exert pressure on central bankers to undertake policies
favorable to
their election (or reelection). Research suggests that, in the
United States,
this may be the rule rather than the exception. For the period
from 1951
to the end of the 1970s, Robert Weintraub found that changes in
Presi-
dential administrations generally resulted in changes in
monetary policy
in a direction consistent with the economic views of the
President.1 Given
that Ronald Regan ran on a platform of reducing infation, Paul
Volker’s
disinfationary policies in the 1980s are an indication that
Weintraub’s
results extend beyond his sample period.
A prototypical case study in central bank accommodation was
8. President Richard Nixon’s reelection campaign in 1972. Infation
was
increasing at the time, and economic theory implied a tighter
monetary
policy. Tighter money, however, was not the policy of choice
for President
Nixon. From his perspective, such policies had cost him the
Presiden-
tial election in 1960. He was not interested in a repeat of that
experi-
ence. Federal Reserve Chairman Arthur Burns accommodated
President
Nixon’s desire that monetary policy not be tightened. Nixon
won the
election, but at a considerable cost to the economy.
Ignorance
A second reason for the failure of discretionary policies is
ignorance. Te
existence of time lags presents a major problem for those
attempting to
implement discretionary policies. Tese lags imply that policy
carried out
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9. 114 MONEY AND BANKING: AN INTERMEDIATE
MARKET-BASED APPROACH
today has its impact in the future. Selection of the appropriate
policy,
then, requires the ability to forecast accurately. Economists,
however, are
notoriously weak when it comes to forecasting future economic
activity.
Tis ignorance is especially pronounced for turning points in the
econ-
omy, where one would anticipate signifcant changes in
discretionary
policy.
Tree time lags encountered when implementing discretionary
policy
are the recognition lag, the execution lag, and the impact lag.
To illustrate
the difculties introduced by these time lags, refer to Figure 6.1.
Real
GDP (y) is plotted against time (t). Te business cycle peak
occurs at time
t1, with GDP equal to y1.
Te decline in economic activity commencing at time t1 is not
discov-
ered until time t2. One reason for this lag is that published
economic data
generally are a record of the past, and turning points in
economic activity
often are not discovered in these data until well after they
happen. For
this cycle, the time interval (t2 – t1) is the recognition lag. It is
the time
that elapses between when the economy changes, and when
10. policy makers
know about the change.
Te policy response is not instantaneous. In the case of monetary
pol-
icy, the central bank must both adopt a new policy and
implement that
policy. Tese events too, require time. Assume that the policy
response,
which is additional monetary stimulation, occurs at time t3. Te
time
interval (t3 – t2), then, is the execution lag. Tis is the amount
time that
elapses between recognition of the problem and when policy
makers
undertake appropriate policy action.
y
y1
y0
y2
y3
y4
t0 t1 t2 t3 t4 t
Figure 6.1 Discretionary policy with time lags
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11. CRITIqUES OF MONETARY POLICY 115
Te impact of this policy action, likewise, is not instantaneous.
Rather
than occurring at a point in time, it is distributed over a period
of time.
Te precise timing of the impact is unknown. Friedman’s
estimates for
the U.S. economy are that it will have little (or no) impact for
the frst
9–12 months, with the total impact occurring over a period of
years.
Simplifying, assume that the impact of monetary policy does
occur at
a single point in time (t4). By that time, the economy has
already entered
the expansionary phase of the business cycle. To moderate
business cycle
fuctuations, this phase of the cycle calls for monetary restraint.
Instead
of monetary restraint, however, the central bank is providing
monetary
stimulus. It has done the wrong thing. Monetary policy will
accentuate
the business cycle upswing and, in doing so, it increases the
amplitude of
the business cycle.
Given the existence of these time lags, appropriate discretionary
pol-
icy for this economic cycle requires that the central bank
undertake sim-
ulative policy before the business cycle downturn occurs, e.g.,
12. at time t0.
Te wisdom to do so, however, requires that (central bank)
economists
correctly forecast the impending peak at t1. Teir inability to
accurately
forecast turning points, or ignorance, generally precludes that.
Friedman’s x-Percent Money Growth Rule
Even though it is inadvertent, central bank implementation of
discre-
tionary monetary policy often makes things worse rather than
better. For
that reason, Friedman recommended scrapping discretionary
policy. In
its place, the central bank should follow a rule and increase the
money
supply at a constant rate. If, for example, a rate of 4% is
selected, the
central bank increases the money supply 4% each year. Tat is
Friedman’s
x-percent money growth rule.
Te particular growth rate that is selected is less important than
select-
ing one. A rate in the neighborhood of 4% may be desirable,
however,
because it approximates the secular growth rate for production.
Synchro-
nizing the growth of money and output would permit
(proximate) long-
run price stability.
Friedman maintains that the potential benefts of employing a
monetary growth rule are enormous. Te principal one is a more
stable
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MIA's FINANCIAL MARKETS AND INSTITUTIONS at
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116 MONEY AND BANKING: AN INTERMEDIATE
MARKET-BASED APPROACH
economy. A volatile monetary policy contributes to economic
instability,
thus increasing the amplitude of the business cycle. Use of a
monetary
rule efectively eliminates this source of cyclical instability.
A second beneft is increased long-run economic growth. As
mone-
tary policy becomes more predictable, the uncertainty faced by
those in
private business is greatly diminished. Tis lowers the risk
premium in
interest rates, and will increase the rate of capital formation in
the econ-
omy. More capital formation leads to increased worker
productivity and
higher living standards.
Finally, use of a monetary rule will eliminate of secular
infation. Had
the Federal Reserve employed such a rule in the past half-
century, the great
14. depreciation that occurred in the purchasing power of the U.S.
dollar would
have been avoided. Elimination of secular infation will enhance
the ser-
vices provided by money, especially those eroded by
unremitting infation.
Despite these potential benefts, Friedman is aware of the forces
militating against adoption of a monetary rule. A major force is
the spir-
itual legacy of the Enlightenment. Te great scientifc and
economic
achievements of the past several centuries have nurtured the
sense that
man has the ability to make things better through manipulation
and con-
trol. When placed in a monetary context, this perspective makes
it easier
for central bankers to inspire confdence in their ability to
successfully
manage monetary afairs.
Public confdence in central bank stewardship is reinforced by
central
bank resistance to a monetary rule. Given the complexities of a
modern
economy, central bankers are often given much greater credit
for their
ability to manipulate aggregate economic activity than is
warranted by
experience. Te general public often basks in the comfort of a
central
bank that is “in control.” As human beings, it is natural that
central bank-
ers fnd such deference to their skills and infuence quite
fattering. It is
15. contrary to human nature to expect them to embrace the
prospect of
replacing their reasoned judgments with a mechanical procedure
that
greatly diminishes their social signifcance.
The Road Not Taken: A Friedman Case Study
It is not possible to know what would have happened had the
Federal
Reserve followed Friedman’s x-percent money growth rule. Tat
is a road
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CRITIqUES OF MONETARY POLICY 117
Table 6.1 Dynamic Equation of Exchange for the U.S. Economy
(Average Annual Growth Rate: 1959–2015)
dM/M + dV/V = dP/P + dy/y
Actual U.S. data 6.9 -0.4 3.4 3.1
Data with x-percent money growth 4.0 -0.4 -0.5 4.1
16. Source: U.S. Department of Commerce, www.bea/gov (retrieved
10/24/2016), and U.S. Govern-
ment Printing Offce, Economic Report of the President (various
issues), www.presidency/ucsb/
edu/economic_reports (retrieved 10/24/2016).
not taken. It is possible, however, to simulate what Friedman
had in mind
through the prism of the dynamic version of the equation of
exchange.
In Table 6.1, that relationship is utilized to compare actual data
for the
56-year period from 1959–2015 with hypothesized data using
Friedman’s
x-percent growth rule.
From 1959–2015, annual U.S. money growth (dM2/M2)
averaged
6.9%. Long-run velocity was relatively stable, declining at an
average
annual rate of 0.4%. Real Gross Domestic Product growth
(dy/y) averaged
3.1%. With too much money chasing too few goods, the United
States
experienced an average secular infation rate (dP/P) of 3.4% per
year.
By comparison, assume the Federal Reserve implements
Friedman’s
x-percent growth rule by increasing the money supply by 4%
each year.
Te velocity of money is relatively stable with the assumed
annual growth
rate (dV/V) the same as the actual growth rate for 1959–2015: –
0.4%.
Friedman argued that such monetary stability would lead to
17. higher eco-
nomic growth. Accordingly, the average annual growth rate for
real GDP
is 4.1%. Tat was the actual rate of growth for the 1950s, the
decade
prior to the implementation of Keynesian economic policies
during the
J.F. Kennedy administration.
For the period under consideration, Friedman’s x-percent money
growth rule yielded long-run price stability. Prices, on average,
declined
0.5% per year. Such price stability is comparable to that
experienced by the
United States when the country was using fduciary money (prior
to 1933).
Had the United States actually experienced such price stability,
the
considerable erosion in the services provided by money would
probably
not have occurred. For example, with long-run price stability,
money
would have continued to serve as a viable store of value. In
addition,
Friedman would likely make the case that United States would
have
been spared the dislocations and economic hardships associated
with the
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18. www.bea/gov
118 MONEY AND BANKING: AN INTERMEDIATE
MARKET-BASED APPROACH
Great Infation of the 1970s and the ensuing disinfation of the
1980s.
He also might argue that, with the x-percent money growth rule,
the
United States would not have sufered through the Great
Recession of
2008–2009. A policy of providing new money at a steady rate
(instead
of pushing short-term interest rates close to zero for an
extended period)
would reduce the likelihood of an asset bubble in housing that
was at the
epicenter of the Great Recession.
Interest Rate Targeting
Central banks in relatively advanced countries generally employ
inter-
est rate targeting to implement discretionary monetary policy.
Excluding
the four-year interlude from 1979–1983, the Federal Reserve
System in
the United States has targeted interest rates for several decades.
While the
analysis that follows applies to interest rate targeting more
generally, the
issue is framed within the context of U.S. monetary policy.
Federal Reserve interest rate targeting conforms to the
transmission
19. mechanism described as Model I in the previous chapter. Te
instrument
variable is open market operations (OMO). Te immediate target
is the
short-term interest rate (ist). Te rate selected for this purpose is
the fed-
eral funds rate, or the rate on immediately available funds.
While it is a
nominal interest rate, the intermediate target is the long-term
real interest
rate (rlt). Te ultimate policy objectives are the price level and
aggregate
spending.
Te Fed encounters two very difcult problems when attempting
to
implement policy through this transmission mechanism. First, it
is using
a nominal interest rate target in a world where rational
economic agents
think in real terms. Te interest rate of importance, then, is the
unobserv-
able real interest rate. Second, the transmission of monetary
policy occurs
across the term structure of interest rates. Te immediate target
is a short-
term interest rate, but the critical variable is the long-term rate
of interest.
The Nominal/Real Dichotomy
Te success of Federal Reserve monetary policy is contingent
upon con-
trol of the real interest rate. Rational economic agents on both
sides of the
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CRITIqUES OF MONETARY POLICY 119
credit market think in real terms and, if one is to change their
behavior
through policy, it is the real interest rate that counts. Unlike the
nominal
interest rate, however, the real interest rate is unobservable. Te
difculty
presented here is that one cannot readily control something that
does not
lend itself to measurement. Tat problem is compounded when
preci-
sion is required. Tat is generally the case, however, because
policymakers
employing nominal immediate targets most often change those
interest
rate targets in increments of one-quarter to one-half percent.
Control of the unobservable real rate of interest is hypothesized
to
occur via changes in the Federal Reserve’s nominal interest rate
target
(the federal funds rate). As noted in Chapter 3, however, the
nominal rate
of interest, too, is comprised of nonobservable components:
infation-
21. ary expectations; default, money, and income risk premiums;
and, time
preferences. Each of these components refects the subjective
valuations
of millions of market participants. Because subjective
valuations of indi-
vidual economic agents are prone to change, one must operate
on the
premise that they do. Tat is, infationary expectations, risk
premiums,
and time preferences are incessantly changing.
If these nonobservable components of the nominal rate of
interest
are unstable, when the Fed changes its nominal interest rate
target, it
cannot know whether the real interest rate is increasing, falling,
or staying
the same. If a policy-induced higher real interest rate indicates
a tighter
monetary policy, and a policy-induced lower real rate the
opposite, the
Federal Reserve does not know whether its monetary policy is
tighter,
easier, or neutral.
To illustrate, three diferent scenarios are presented in Table 6.2.
Tey are designated as Cases I, II, and III. Te frst scenario (Case
I) is
the initial condition. Te nominal interest rate is 5%, which is
also the
Fed’s targeted interest rate. With a 2% expected rate of infation,
the real
Table 6.2 The Nominal Interest Rate and Its Components
22. i r (dp/p)* Risk premium
Marginal rate of
time preference
Case I 5 3 2 ½ 2½
Case II 6 4 2 ½ 3½
Case III 4 2 2 ½ 1½
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120 MONEY AND BANKING: AN INTERMEDIATE
MARKET-BASED APPROACH
interest rate is 3%. Te latter is apportioned into a risk premium
and a
marginal rate of time preference.2
Assume, initially, that the Federal Reserve attempts to tighten
mon-
etary policy. In Case II, it raises its target for the nominal
interest rate
to 6%, and provides reserves less liberally to the banking
system. With
tighter credit conditions, the nominal rate increases to the
desired level.
Assuming no change in infationary expectations, the real rate
increases to
23. 4%. Te higher real rate of interest leads to reduced capital
goods expen-
ditures, and a higher marginal rate of time preference. In this
scenario, the
Fed thinks that monetary policy is tighter and, indeed, it is. Tis
is how
monetary policy with interest rate targeting is supposed to
work.
With the subjective preferences of economic agents constantly
chang-
ing, however, the world is much more complex than this. For
example,
do these Case II numbers still constitute tighter monetary policy
if the
higher real interest rate would have occurred as a result of
market activity
alone? Commence again with Case I initial conditions, i.e., i =
5% and
r = 3%. Now, assume an increasingly robust economy with
businessmen
becoming more optimistic. Teir increased time preferences for
current
expenditures are expressed in the form of a greater demand for
capital
goods. Tighter credit conditions lead to a higher nominal rate
(6%) and a
higher real rate (4%). Case II numbers again prevail.
Superimpose upon these events an increase in the Federal
Reserve’s
target for the nominal interest rate—from 5% to 6%. Te Fed’s
objective
is to increase the real interest rate by 1% (from 3% to 4%). In
this case,
the Fed does not need to adjust how it is providing reserves to
24. the bank-
ing system. Te higher interest rates come about through market
activity
alone, and do not refect any change in Fed policy. When the
Federal
Reserve adjusts its interest-rate target upward, that target is
simply fol-
lowing the market rate.
Tis is a case where the Federal Reserve thinks monetary policy
is
tighter when, in fact, it is not. Errors of this kind are likely
when the
real interest rate follows a pro-cyclical pattern. If business
managers and
consumers become more optimistic during a business cycle
expansion,
their greater optimism is expressed in the form of an increase in
their time
preferences for current expenditures. Te real (and nominal)
interest rate
rises. If the Federal Reserve simultaneously becomes concerned
about the
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CRITIqUES OF MONETARY POLICY 121
exuberant economy, it will move to tighten monetary policy. As
in the
example above, however, it will erroneously interpret the
25. market-driven
rise in interest rates as policy-induced.
Te Federal Reserve is prone to making the opposite kind of
error
when the economy is contracting. Business managers and
consumers
become more pessimistic. Tey experience decreases in their
time pref-
erences for current expenditures, and the real (and nominal)
interest rate
falls. Te Fed, in an attempt to stimulate aggregate demand,
lowers its
interest rate target. With the nominal and real rate already
falling, the
Fed is unable to distinguish market-induced declines in rates
from those
occasioned by Fed policy.
Tis scenario is captured in Case III (Table 6.2). Commencing
with
the initial condition (Case I), declines in the real and nominal
rate occur
in response to reduced time preferences. Te nominal rate falls
from 5%
to 4%; the real rate, from 3% to 2%. Simultaneously, the
Federal Reserve
lowers its target for the nominal interest rate from 5% to 4%. Its
intent is
to lower the real rate by a similar amount (from 3% to 2%). Te
Federal
Reserve does not need to adjust its provision of reserves to the
banking
system, because both the nominal and real rates reach their
targeted levels
through market activity. Tis is a case where the Fed thinks that
26. monetary
policy is easier when, in fact, it is not.
Tus, there are serious reservations concerning the Federal
Reserve’s
ability to efectively control the real rate of interest. When the
Fed changes
its nominal interest rate target, it does not know with any
assurance either
the magnitude or direction of policy-induced changes in the real
rate of
interest.
The Term Structure Problem
A second problem the Federal Reserve confronts when targeting
interest
rates relates to the term structure of interest rates. Not only
does the
Fed not know whether adjustments in its immediate target result
in the
desired change in the real interest rate, but those policy changes
also must
be transmitted across the term structure of interest rates. Te
Federal
Reserve’s operating target is the short-term nominal rate, but its
interme-
diate target is the long-term real interest rate.3
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27. 122 MONEY AND BANKING: AN INTERMEDIATE
MARKET-BASED APPROACH
Te rationale for this transmission mechanism (Model I) is
discussed
in Chapter 5. Outlays for durable goods, both business and
consumer,
are more easily deferred than are expenditures for nondurable
goods. As a
consequence, durable goods account for much of the volatility
in aggre-
gate spending. Attempts by policy makers to infuence aggregate
spending
(and the price level), then, are geared towards controlling
expenditures for
those types of goods. With durable goods purchases frequently
fnanced
through the issue of long-term bonds, those purchasing durable
goods are
sensitive to the long-term rate of interest. It follows that, when
the Fed
employs interest rate targeting, it must target the long-rate.
Precisely how the Federal Reserve successfully navigates the
term
structure and, simultaneously engineers changes in the real
interest rate,
is not clear. Moreover, various theories of the term structure
(discussed in
Chapter 3) do not provide much help. If anything, they cast
additional
aspersion upon the Fed’s ability to successfully implement
discretionary
policy through interest-rate targeting.
Explanations based on the segmented markets hypothesis, for
28. exam-
ple, are not encouraging. If market participants adhere strongly
to their
maturity preferences, there is little likelihood that policy-
induced changes
in the short-term interest rate target will be transmitted across
the term
structure to long-term rates of interest. Federal Reserve control,
in turn,
is marginalized.
On the other hand, information requirements implied under the
unbiased expectations and the liquidity preference theories
present an
even more serious obstacle for those conducting monetary
policy. First,
the Fed must have prior knowledge of the term structure of
infation pre-
miums and the term structure of risk premiums. Second, it must
know
how those term structures are changing independent of monetary
policy.
Finally, it must also know how a given change in its short-term
interest
rate target will afect both of those underlying term structures.
Com-
pounding the Fed’s information problem is the fact that both
infationary
expectations and risk premiums are imbedded in the term
structure of
interest rates, and not directly observable.
It is clear that the U.S. central bank faces serious information
prob-
lems when attempting to target long-term real interest rates
through use
29. of a short-term nominal operating target. If the Federal Reserve
acts as
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CRITIqUES OF MONETARY POLICY 123
if it can orchestrate desired changes in aggregate spending and
the price
level through this procedure, it is committing what Friedrich
von Hayek
called “the pretense of knowledge.”4 It is pretending to know
things that,
in fact, it does not.
A Twenty-First Century Case Study
Tis knowledge problem confronting the Federal Reserve is a
good illus-
tration of what happens when the criteria for selecting monetary
targets
(discussed in the previous chapter) are not satisfed. Because it
is not pos-
sible to accurately measure the long-term real interest rate, the
Federal
Reserve is employing a target it cannot control. Moreover, lack
of knowl-
edge of the long-term real rate also means the linkages in Model
I are not
30. predictable.
U.S. monetary policy from 2004–2006 exemplifes the difculties
encountered when these monetary target criteria are not met.
Starting in
June, 2004, the Federal Reserve increased its target for the
federal funds
rate ffteen consecutive times. As a consequence, the federal
funds rate
target in April, 2006 was 4.75% versus 1.00% in the frst half of
2004.
Tose changes are chronicled in Table 6.3.
Many observers routinely describe these upward adjustments in
the federal funds rate target as tighter monetary policy. Tere are
seri-
ous doubts, however, about such an interpretation. It is true that
other
short-term nominal rates increased along with the federal funds
rate. Te
three-month Treasury-bill rate, for example, rose from 1.17% to
4.60%
between June 1, 2004 and March 1, 2006.5
But, as previously noted, higher short-term nominal interest
rates do
not necessarily mean tighter monetary policy. Long-term
nominal interest
rates actually fell during the same 21-month period. Te rate for
20-year
U.S. Treasury securities declined from 5.45% to 4.74%. Tese
changes
in both long-term and short-term rates for U.S. Treasury
securities are
refected in Figure 6.2. It depicts the shapes of the term structure
of inter-
31. est rates for U.S. Treasury securities on both June 1, 2004 and
March 1,
2006. Te yield curve in 2006 became noticeably fatter.
Lower long-term nominal interest rates, however, are not the
issue. It
is long-term real interest rates, and not nominal rates, that are
critical for
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124 MONEY AND BANKING: AN INTERMEDIATE
MARKET-BASED APPROACH
Table 6.3 Federal Funds Rate Target
Date Level (percent)
2006
March 28 4.75
January 31 4.50
2005
December 13 4.25
November 01 4.00
32. September 20 3.75
August 09 3.50
June 30 3.25
May 03 3.00
March 22 2.75
February 02 2.50
2004
December 14 2.25
November 10 2.00
September 21 1.75
August 10 1.50
June 30 1.25
2003
June 25 1.00
Source: Board of Governors of the Federal Reserve System.
6
5
4
3
33. 2
1
0
3 month 6 month 1 year 5 year 10 year 20 year
6/1/2004 3/1/2006
Figure 6.2 Term structure of interest rates U.S. treasury
securities:
Constant maturity
Source: Board of Governors of the Federal Reserve.
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CRITIqUES OF MONETARY POLICY 125
economic decision makers. If monetary policy was, indeed,
tighter during
this 21-month period, long-term real interest rates must have
increased
while nominal rates were falling. Moreover, the increase in real
rates must
have occurred as a result of monetary policy and not due to
other factors
such as an increase in default risk or changes in time
34. preferences for cur-
rent expenditure. While such a scenario appears doubtful, no
one knows
for certain. Hence, the appropriate answer to the question about
whether
monetary policy is tighter is: “I don’t know.”
Monetary Aggregates and Monetary Control
Recent Issues with Monetary Control
After facing difculties with interest-rate targeting during and
after the
Great Recession (2008–2009), the Federal Reserve embarked on
sev-
eral massive asset purchase programs described as quantitative
easing.
Tose carried out during the Great Recession are discussed in
Chapter 5
(pp. 108–109).
While the Fed’s asset purchase programs were not advanced
with the
stated intent of increasing monetary aggregates, they did. In
doing so,
these programs raised an additional issue relating to central
bank control
of the money supply. Tese issues are discussed in the context of
the gen-
eral money supply model in Chapter 4 (equation 4.2).
Te magnitude of the Federal Reserve’s asset purchases caused
the
monetary base in the United States to explode. Base money
increased
more than 360% from 2007 and 2014, and was largely in the
35. form
of increases in bank reserves. Under more normal
circumstances,
one would anticipate a massive increase in the money supply,
huge
increases in spending, and the potential for the largest infation
in U.S.
history.
To date, none of these things have happened. Te reason is that
banks
have not used this infusion of bank reserves to extend additional
bank
credit (and expand deposit money). Instead, those reserves were
almost
entirely held in the form of excess reserves.
In the money supply model, an increase in the aggregate bank
excess
reserve ratio causes the money multiplier to decrease. In this
case, because
the increase in bank excess reserves was so massive, the
multiplier collapsed.
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126 MONEY AND BANKING: AN INTERMEDIATE
36. MARKET-BASED APPROACH
As shown in equation (6.1), the large increase in the monetary
base
was virtually entirely ofset by a fall in the money multiplier. In
the con-
text of these changes the consequences for money (which did
rise) were
minimal.
M = B m. (6.1)
← ↑ ↓
Tis experience has important implications for monetary policy.
It
difers from the liquidity trap explanation advanced by early
Keynesians.
In that case, the central bank increases the money supply and it
has no
efect on spending. People hold rather than spend the additional
money,
and velocity falls. When this happens, monetary policy is
inefective.
In the present case, the efectiveness of monetary policy is
questioned
for a diferent reason. Unlike the previous case, the money
supply does
not increase, or it does so minimally. What distinguishes the
recent expe-
rience is collapse of the money multiplier as shown in (6.1).
Te precipitous fall in the multiplier represents a breakdown in a
transmission mechanism for monetary policy. In Chapter 5, the
trans-
mission mechanism employing monetary aggregates as targets
37. was Model
II. In that transmission mechanism, what links base money to
the money
supply is the base money multiplier. Te usefulness of that
transmission
mechanism is predicated upon a predictable relationship for
transforming
base money into money. It is that relationship that fell apart.
Tis experience raises serious questions concerning the ability of
the
Federal Reserve to control the money supply. When combined
with the
lackluster results from interest rate targeting, it appears that
both trans-
mission mechanisms I and II for implementing discretionary
monetary
policy did not perform as expected during and after the Great
Recession
(2008–2009).
Why the Federal Reserve Needs an Exit Strategy
Te massive infusion of bank reserves (and base money) into the
U.S.
fnancial system from 2008 to the present leaves the Federal
Reserve with
an important legacy issue. If the United States is to avoid
signifcant
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38. CRITIqUES OF MONETARY POLICY 127
future infation, the Fed must undertake future monetary policy
that
(largely) removes that base money from the system or,
alternatively, pro-
vides banks with an incentive to not activate the massive excess
reserves
they now hold. Te description of how the Federal Reserve plans
to do
this is known as the Fed’s exit strategy.
Te magnitude of the problem confronting the Federal Reserve is
apparent in Table 6.4. From 2007–2014, bank reserves and base
money
increased by 2,813% and 364%, respectively. Tese dramatic
increases
were not refected in the money supply (M2) which rose by only
56.4%.
Tis surprisingly modest number is the result of the collapse of
the base
money multiplier (m), which fell by 64.4%. Tese data comport
with the
directional changes in equation (6.1) above.
Te problem confronting the Federal Reserve is about what
happens
if banks activate available excess reserves. Since the most
recent business
cycle trough (June, 2009), businesses and households have
behaved very
cautiously. Credit demands by both sectors have been
restrained, and
39. economic growth has been tepid.
Table 6.4 Bank Reserves, Base Money, Money Supply,
and the Money Multiplier for the United States 2001–2014
Year Reserves Base money M2 m
2001 86.3 641.1 5181.7 8.08
2002 88.1 697.1 5565.8 7.98
2003 93.4 741.0 5953.5 8.03
2004 96.3 776.8 6235.5 8.03
2005 96.7 806.6 6501.8 8.06
2006 95.0 835.0 6842.9 8.20
2007 93.9 850.5 7263.1 8.54
2008 234.9 835 7757.5 7.67
2009 945.2 1796.8 8383.0 4.67
2010 1143.4 2031.7 8593.4 4.23
2011 1575.7 2539.1 9224.7 3.63
2012 1612.0 2662.2 10020.0 3.76
2013 2144.2 3271.8 10696.4 3.27
2014 2735.4 3947.0 11356.8 2.88
Source: St. Louis Federal Reserve Bank-FRED
(//fred.stlouisfed.org), October 31, 2016.
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128 MONEY AND BANKING: AN INTERMEDIATE
MARKET-BASED APPROACH
If, in the future, both businesses and households throw caution
to
the wind, and become very aggressive in their demands for
credit, banks
(which are awash in liquidity) are in a position to accommodate
them.
Moreover, banking competition makes them inclined to do so. If
an indi-
vidual bank refuses a customer’s demand for credit, that
customer is likely
to take his/her banking business to another bank.
Meeting these credit demands means an increase in money
growth,
which has the potential to accelerate sharply. Te acceleration in
money
growth, in this case, is occasioned by an increase in the base
money mul-
tiplier. As banks reduce their holdings of excess reserves, the
aggregate
excess-reserve ratio falls and the money multiplier rises.
41. Te potential impact on the money supply is captured by
assuming
that the multiplier returns to its prerecession level of 8.54
(2007). If that
adjustment had occurred in 2014, the impact on the money
supply for
that year is shown in (6.2).
M2 = $33,707.4 = B = $3,947.0 * 8.54 (6.2)2014 * m2007
With a multiplier of 8.54 in 2014 (and assuming the same 2014
level for base money), the money supply would have been
$33,707.4
billion for that year instead of the recorded level of $11,356.8
billion.
Tat represents a 196.8% increase in the money supply. In other
words,
the money supply has the potential to grow this much if the
multiplier
were to return to its prerecession level. If all of this money
growth were
to occur in a single year, the average price would increase by a
magnitude
of the same order, or 196.8%.6 Tus, the potential exists for the
highest
infation rates in U.S. history. Tat is why the Federal Reserve
needs an
exit strategy.
Rational Expectations
Economists know that a person’s expectations afect the
economic deci-
sions made by that individual. Rational expectations theory is
concerned
with how those expectations are formed and, also, how
42. economists model
those expectations. Much of this theory was developed in
response to the
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CRITIqUES OF MONETARY POLICY 129
use of large macroeconometric models (by business and
government). Sta-
tistical in form, these models were an adjunct to the Keynesian
revolution
in macroeconomic theory. Te models often contained several
hundred
equations, and were used for forecasting purposes. Keynesian
economists
used the models to advise governments about the consequences
of difer-
ent activist policies, while those in the private sector used them
as an aid
in business decision-making.
Many of the equations in macroeconometric models were
behavioral
in nature. Tat necessitated the modeling of expectations, even
though
those expectations were unobservable. Proxies for these
unknown expec-
tations were most often obtained by assuming that economic
agents have
adaptive expectations. With this approach, the expected value of
43. a vari-
able was estimated as a weighted sum of past values of that
same vari-
able. Historical time series data were employed for rendering
concrete
estimates.
Econometric models constructed using this methodology often
result
in large forecasting errors, and economists in the rational
expectations
tradition have a ready explanation for this. Reliance on adaptive
expec-
tations as a proxy for actual expectations is an inherent
weakness of the
models. For, modeling human behavior in this way is
tantamount to
assuming that economic agents are irrational. Te reason is that
economic
agents with adaptive expectations make systematic errors. Tat
is, they
repeatedly make the same mistakes.
An alternative to assuming that expectations are adaptive is to
assume
they are rational. Rational individuals are not restricted to using
past
information (such as past values of variables) when forming
their expec-
tations. Teir expectations are formed by taking into account all
informa-
tion that is worthwhile acquiring. Agents behaving in this
fashion are said
to have rational expectations. Once the models of economists
incorporate
rational expectations, economic agents are less prone to making
44. the same
mistakes repeatedly—systematic errors. Moreover, such rational
behavior
has implications for the efectiveness of economic policy.
If economic policy afects economic agents in a signifcant way,
then it
is rational for them to take the efects of that policy into
account. Further-
more, if those administering policy behave consistently,
economic agents
will learn how that policy is implemented under diferent
economic
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130 MONEY AND BANKING: AN INTERMEDIATE
MARKET-BASED APPROACH
Table 6.5 Policy Impotence Theorem
Period M V = P y
I → ↑ → ↑
II ↑ ↓ → →
circumstances. Once they do, individuals will adjust their
behavior to
the policy, and make necessary behavioral changes before any
45. change in
policy is undertaken. Because adjustment to the policy has
already taken
place, no behavioral response follows any predictable change in
economic
policy. In rational expectations theory, this result is known as
the Policy
Impotence Teorem.
When behavior is rational in this sense, discretionary policy
loses its
efectiveness. An example of such policy impotence in the
context of ratio-
nal economic behavior is chronicled in Table 6.5. In Period I,
individuals
anticipate monetary ease that will occur in Period II. Sensing
that they
will be able to fnance additional expenditures at a lower rate in
the near
future, they adjust their current expenditures upward. Producers
respond
by increasing production in Period I and, in the absence of a
change in
the money supply, the ofsetting entry in the equation of
exchange is an
increase in the velocity of circulation of money (V↑).
In period II, the central bank increases the money supply to
stimu-
late aggregate demand. However, there is no increase in
spending because
rational economic agents anticipated this monetary stimulation
and have
already adjusted their spending plans (in Period I). In Table 6.5,
the
money supply increases in Period II but GDP expenditures
46. remain the
same. Te ofsetting entry is a decline in velocity (V↓). Te
monetary
ease engineered by the central bank in Period II has no efect on
current
spending, i.e., it was impotent.
Te rational expectations argument against the use of
discretionary
policy does difer from that of Friedman (and the monetarists) in
one
important respect. In Friedman’s case, discretionary policy does
not work
because policymakers are either ignorant or subject to political
infuence.
For the rational expectations economists, discretionary policy
does not
work because those afected by the policy are the opposite of
ignorant.
Tey are too smart (or rational).
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CRITIqUES OF MONETARY POLICY 131
The Austrian Perspective on Monetary Policy
47. Economists in the Austrian tradition generally favor “hard
money.” Tey
fnd it vexing that a monetary economist such as Milton
Friedman favors
reliance upon markets everywhere except in his area of
expertise, the realm
of money. Te Austrian position is that money is too important to
be
left to government. Instead, money and all monetary relations
should be
determined through exchange activities in the marketplace.
Because fdu-
ciary money was a spontaneous market development, and fat
money was
not, Austrians generally favor reestablishing fduciary money by
returning
to the gold standard.
If the quantity of money and all monetary relations are
determined
by market participants, government has no monetary role. Tere
is no
monetary policy. For that reason, Austrians are against all
monetary pol-
icy as practiced under fat money regimes. Tat would include
Friedman’s
monetary growth rule as well as all variations of discretionary
policy.
At the center of the Austrian critique of monetary policy is the
con-
cept of the price level. Te importance attached to the idea of an
average
price dates back to the early 20th century, when Irving Fisher
argued that
the value of money should be standardized.7 By this, he meant
48. that the
objective of government monetary policy should be to stabilize
the average
price, or the price level. While Fisher was unsuccessful in his
crusade to
standardize money, the concept of the price level subsequently
assumed a
life of its own. After governments mandated the use of fat
money, the price
level became a variable subject to manipulation by monetary
authorities.
Despite the eforts by central banks to manage the price level,
Austrians give the concept little credence. For them, the price
level has no
signifcance independent of its component parts—the individual
prices.
To the extent that there is an average price, it is an aggregation
of these
individual prices. In a market setting, each individual price has
meaning,
or informational content. Each is an expression of the subjective
valua-
tion that individuals have placed on that object. Viewed
collectively, a set
of individual prices represents relative valuations.
With no rigid dichotomy separating microeconomics and macro-
economics, the signifcance Austrians attach to individual prices
is not
restricted to the realm of microeconomics. Tey are equally
important
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132 MONEY AND BANKING: AN INTERMEDIATE
MARKET-BASED APPROACH
in a macroeconomic setting. Hence, when central banks
manipulate the
price level, without regard to its constituent parts, they destroy
the infor-
mational content of individual prices. In doing so, they disrupt
the crit-
ical role that prices play in coordinating the diverse economic
activities
that collectively make up the aggregate economy.
Assume, for example, that a central bank employs monetary
policy to
stabilize the average price. Te problem here is that market
participants
may have preferences that are not consistent with an unchanged
exchange
value for money. In the absence of monetary policy, they may
have valued
money either more highly or less highly than before. If they
valued money
more highly, their preferences were consistent with defation
rather than
price stability. Alternativel y, placing a lower value on money
would result
in infation.
When money is a strictly a market phenomenon, infation,
defation,
and price stability are all possible outcomes. Moreover, there is
50. no analyt-
ical basis for favoring one of these outcomes over the others.
Tis view is
antithetical to conventional thinking, especially with regard to
defation.
Most contemporary policymakers, and many economists,
consider defa-
tion highly undesirable—something that must be avoided at all
costs.
Te source of this bias against defation is the Great Depression
expe-
rience, when defation was accompanied by an unprecedented
drop in
production. To generalize from this episode, however, is
ahistorical. Data
generally do not afrm such a linkage between defation and
economic
decline.8 Moreover, given our experiences with fat money, it
seems much
more likely that massive economic decline would be
accompanied by sig-
nifcant infation rather than defation.
In contrast to the conventional view, Austrians do not readi ly
dismiss
defation when it is the natural outcome of economic activity.
Defation
generally occurs when a country’s growth rate for production
exceeds the
growth rate of money. Money becomes more scarce in relation
to goods,
and that tends to occasion an increase money’s exchange value.
Tis hap-
pened in the United States during the last third of the 19th
century. Te
51. country was on the gold standard, and there were few new
discoveries of
gold to augment the world’s gold supply.
Data for this period, assembled by Christina D. Romer, appear
in Table 6.6. Defation averaged 1.36% per year from 1869 to
1899.
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CRITIqUES OF MONETARY POLICY 133
Table 6.6 Prices and Production in the United States: 1869–
1899
(percent change)
Year Real GNP
GNP-Implicit price
defator
1869–1879 5.38 -3.23
1879–1889 3.21 0.03
1889–1899 3.82 -0.85
1869–1899 4.13 -1.36
Source: Romer (1989), pp. 1–37.
52. In contrast to the conventional view of defation, this period of
falling
prices was not one of economic calamity, or even malaise.
Instead, it was
a period characterized by much innovation and very rapid
industrializa-
tion. Te average growth rate for production was considerably
higher
than average growth during the 20th century. Moreover,
production
growth was, by far, most rapid in the decade with the highest
rate of
defation (1869–1879).
Historical episodes like this suggest that changes in the general
price
level (such as infation or defation) generally do not cause
problems when
they are driven by market forces. A collateral issue, though, is
whether
problems arise when the source of the price-level change is
monetary
manipulation by the central bank, and not market adjustments
occurring
in response to changing market conditions.
Austrians answer this question in the afrmative. Consider,
initially,
what happens when changes in the quantity of money are a
derivative of
the market process. Allocation of additional resources to the
production
of new money, in this case, originates with decisions made by
individ-
ual market participants. As a response to market demand, the
53. additional
money was, in a sense, “ordered” by those market participants.
It refects
their preferences concerning the use of scarce resources. Any
change in
prices brought about by the new money is, likewise, a part of
the same
market process whereby individual plans and preferences are
rendered
consistent with one another.
Te situation is entirely diferent when the source of a change in
money is the central bank. In this case, the additional money is
not
ordered by market participants. As a consequence, it is not a
part of the
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134 MONEY AND BANKING: AN INTERMEDIATE
MARKET-BASED APPROACH
market adjustment process that renders individual plans
consistent with
54. one another. Instead, the new money is a disruptive force in
markets. By
changing relative prices, compared to what they otherwise
would have
been, it destroys the informational content of market prices.
Relative
prices no longer represent that delicate balance necessary to
coordinate
economic activity across markets.
A critical price often distorted by monetary policy is the real
interest
rate. Tis rate refects the time preferences of market participants.
A given
real rate specifes how much future consumption economic
agents are
willing to sacrifce in order to have more present consumption.
By afect-
ing how consumers distribute consumption across time, the real
interest
rate plays an essential role in the intertemporal allocation of
resources.
When monetary policy brings about a change in the real interest
rate, it
adversely afects the intertemporal allocation of resources. It
does so by dis-
torting the informational content present in a market-determined
real rate
of interest rate. Te new real interest rate occasioned by
monetary policy
emits the “wrong” signal to market participants, and the
economic coor-
dination brought about by market prices is disrupted. Production
plans of
frms are no longer consistent with the preferences of their
55. customers.
Te disruptive infuence of monetary policy is illustrated by
compar-
ing situations with and without monetary policy. Te market
under scru-
tiny is the loanable funds market. Prior to the introduction of
monetary
policy, the real interest rate plays its allocative role. In doing
so, it renders
the plans of all economic agents consistent with one another.
Tose plans
are refected in the demand and supply curves D and S in Figure
6.3.
Plan consistency occurs at the market clearing rate r0. Te
quantity of
loanable funds supplied, S0, shows abstinence from present
consumption
by economic agents. It is exactly equal to the quantity of
loanable funds
demanded, D0. Tis demand originates with consumers desirous
of con-
suming more than their incomes, and producers borrowing to
acquire
capital goods.
Intertemporal economic coordination occurs in this case because
the real interest rate is transmitting the correct information to
mar-
ket participants. Te amount of resources released from (net)
present
consumption is precisely absorbed by those borrowing to
purchase cap-
ital goods. Tose abstaining from present consumption are
choosing
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CRITIqUES OF MONETARY POLICY 135
r S
S˜
r0
r1
D
D0, S0 D1, S1 D, S
Figure 6.3 Market for loanable funds
an increased amount of future consumption. Tat demand for
future
consumer goods will be accommodated by a larger volume of
future
output made possible by current capital formation.
Such intertemporal coordination of economic activity no longer
pre-
vails once monetary policy is introduced. Te reason is that the
57. informa-
tion contained in the real interest rate is distorted by monetary
policy.
To show this, assume the central bank increases the money
supply. Te
supply curve for loanable funds shifts to the right (to S´). Tere
is now an
excess supply of loanable funds at r0, and the real interest rate
falls to r1.
While this lower real interest rate does clear the credit market,
the rate
did not fall due to any change in the plans of individual
economic agents.
It did not fall, for example, because consumers desire to defer
more con-
sumption to the future, or because producers choose to purchase
fewer
capital goods. A lower real interest in either of those
circumstances would
convey such a change in preferences to others in the market.
Instead, the source of the decline in the real interest rate is the
addi-
tional funds made available through monetary policy. By falling
without
any changes in the plans of economic agents, the informational
content of
the real interest rate is compromised. At r1, the real interest rate
is below
the level (r0) that renders the diverse plans of economic agents
consistent
with one another. Te new real interest rate is transmitting the
wrong
signals to market participants.
58. Producers are encouraged to purchase more capital goods, and
they
bid the necessary resources away from those producing
consumer goods.
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136 MONEY AND BANKING: AN INTERMEDIATE
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Te problem is that this redirection of resources is not consistent
with
consumer preferences. Consumers have not chosen to tradeof
additional
present consumption for more future consumption. Tis
miscommuni-
cation brought about by monetary policy has important
macroeconomic
consequences. At some point, this misallocation of resources
will have
to be rectifed. Te endplay involves economic recession with all
of its
attributes—falling (and possibly negative) profts, idle capital
goods,
unemployment, and business bankruptcies.
From the Austrian perspective, then, all monetary policy is
disruptive
59. rather than benefcial. It destroys the informational content of
market
prices. Unfortunately, to undo the pernicious efects of such
policy is
not a costless proposition. Requisite adjustments in the
allocation of
resources are similar to those that are necessary at the end of a
pro-
tracted war. Large quantities of resources are misallocated in
the sense
that they are used to produce war materials that are no longer
useful.
Tese situations often lead to a period of falling output and
increased
unemployment.
Case Study: Federal Reserve Policy and Malinvestment
Austrian economists make the case that recent Federal Reserve
policy is
instructive for understanding the nature of boom/bust cycles.
First and
foremost, such cycles are generated by central banking policy.
In that
context, the Great Recession of 2008–2009 is viewed as a
prototypical
business depression emanating from prior interest rate policies
of a central
bank, in this case the Federal Reserve.
In the frst decade of this century, Federal Reserve policymakers
were
convinced that the U.S. economy was facing the specter of
defation. As
noted earlier, such a prospect is generally viewed by those
implementing
60. monetary policy as an anathema. Te Federal Reserve reacted
accordingly.
Te antidote for defation was an increase in aggregate spending.
From
the Federal Reserve’s perspective, lower interest rates were in
order. Tat
they engineered. Te target rate for the federal funds rate was
reduced
sharply, and eventually held at 2.0% or less for more than three
years—
from November, 2001 to December, 2004. Te intent was to
defuse
defationary forces by encouraging greater spending on durable
goods.
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CRITIqUES OF MONETARY POLICY 137
Te problem, from an Austrian perspective, is that interest rates
are
something more than prices subject to manipulation by the Fed.
Tey
are critical for the intertemporal coordination of economic
activity. By
manipulating interest rates, the Federal Reserve destroyed the
informa-
61. tional content of market prices and disrupted the allocation of
resources
across time.
Te policy-induced lower interest rates encouraged more
roundabout
productive activities, i.e., a greater production of durable
goods. Tat,
indeed, was the Fed’s intent. Te difculty is that consumers did
not,
through their market activity, initiate the order for these
additional capi-
tal goods. Tey came about because consumers were reacting to a
false set
of prices engineered by the central bank.
In this episode, a sizable portion of the addition to the country’s
cap-
ital stock was in the form of new housing. Te housing boom
contrib-
uted, temporarily, to a more robust level of economic activity.
Tat boost
in activity was not to be permanent. From the Austrian
perspective, the
bloated housing stock was a manifestation of a previous
misallocation of
resources—one induced by Federal Reserve policy. It is what
Austrians
refer to as malinvestment. Te market correction, or the bust,
played out
as the Great Recession of 2008–2009.
Postscript
Tese critiques provide insight into the kinds of problems
confronting
62. modern governments as they manage fat money systems.
Collectively,
they explain why those charged with that responsibility often
perform
poorly and sometimes fail. Teir task is a daunting one. As an
indication,
critics cite the following skills and/or conditions as those most
likely to
result in a favorable discretionary monetar y policy experience.
• Monetary policy is driven by economic considerations, and is
generally unafected by politics.
• While individuals in the private sector are unable to accu-
rately forecast the future (and especially business cycle turning
points), individuals employed by the central bank are able to
do so.
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138 MONEY AND BANKING: AN INTERMEDIATE
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• Te unobservable long-term real interest rate is amenable to
control by the central bank.
• Te money supply is amenable to control by the central bank.
63. • Even though economic agents in the private sector are afected
in a dramatic way by monetary policy, they make no attempt
to anticipate and respond to future central banking policy.
• Te role that prices, and especially the interest rate, play
in the coordination of economic activity can be safely
disregarded by monetary authorities.
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