FINC 310Money and Capital MarketsPhase 5 Individual Project AssignmentPoints Possible: 250As shown...

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FINC 310Money and Capital MarketsPhase 5 Individual Project AssignmentPoints Possible: 250As shown in the chart below, the money supply (i.e., M1) in the U.S. has increased substantiallyfrom the end of 2008 to today.For the Phase 5 IP, I want you to write a paper of no longer than 2 pages (single spaced, 12 pt.Times New Roman font, one inch margins on all sides) exploring the causes and effects of thisevent.Divide your paper into sections as follows:1. How has the Federal Reserve accomplished this massive increase in the money supply(specifically, what tool or tools has the Fed used to increase the amount of coin/currency anddemand deposits in the economy)? Describe in detail the specific action (or actions) taken by theFed to create this large increase in M1 including start and end dates of specific actions.2. Why has the Federal Reserve chosen to pursue this policy? That is, what economic and politicalevents moved the Fed to take this action?3. According to Monetary Theory (specifically, the equation of exchange: MV = PQ), what are theexpected short term and long term consequences of this policy with regards to the aggregateprice level (i.e., P) and GDP growth (i.e., Q) according to: (1) Keynesians and (2) Monetarists?To adequately accomplish this part of the task, you will need to explain the Keynesian view ofmonetary policy and the Monetarist view of monetary policy vis-à-vis the equation of exchange.4. Using the equation of exchange, explain why the increase in the money supply has had nodiscernible impact (at least so far) on either P or Q. What do you think has caused this shift inbehavior?5. What are your predictions for the U.S. economy (inflation, joblessness, GDP growth, etc.) overthe next two years? Why? (Note: this last question is purely your thoughts about the subject –there is no right or wrong answer to this question).Each section of the paper will be equally weighted (that is, each section represented by questions 1through 5 above is worth 50 points). Please contact me via email if you have any questions aboutthe assignment or ask questions in the chat session tonight.

David · Accepted Answer

The US National Bureau of Economic Research announced beginning of a recession in December 2007
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US money supply has substantially increased from 2008 till date. This paper aims to locate the reasons and effects of this continuous increase in money supply.
Reasons:
The US National Bureau of Economic Research announced beginning of a recession in December 2007. This recession is the worst recession faced by global economy after World WarII. The major results of this recession was:
a) decrease in US GDP : US GDP started to decrease from 3rd quarter of 2008. 
b) Decrease in capital investment , specially residential investment
c) Decrease in US domestic aggregate demand 
The major reasons of this recession were:
a) Oil price hike: in early 2008, crude oil price exceeded $100 per barrel for the 1st time and in July 2008, it increased to $147.30 per barrel, resulting in cost push inflation. 
b) Housing bubble: during previous years of inflation, poor families were offered mortgage schemes with low interest rate and low down payment. Following the beginning of recession, resulting in job loss, these loans could not be maintained or repaid anymore. As a result, all of them tried to sell their property. This oversupply of housing resulted in sharp decline in housing price. The financial institutions faced huge loss due to these poor debt obligations, resulting in liquidity crisis throughout the economy. 
Moreover, the slowdown of housing sector affected the economy in several ways, such as unemployment in construction sector, fewer investment in construction and furnishing sectors and lower revenue generation from property tax for the local government
c) Dollar devaluation: continuous devaluation of Dollar affected US economy in following ways:
i) as crude oil is purchased in dollars, devaluation of dollar resulted in even higher oil price
ii) devaluation of dollar resulted in US treasury bills and bonds, resulting in sharp decline in bond price and increase in rate of interest
iii) due to low value of dollar, FED could not lower the interest rate any more as it would result in huge capital outflow, worsening the value of dollar. 
The major monetary policy tools used to combat this recession were:
a) Cutting down the federal fund rate: the federal fund rate was reduced to 0-.255% in december 2008.This fall in federal fund rate,

FINC 310Money and Capital MarketsPhase 5 Individual Project AssignmentPoints Possible: 250As shown in the chart below, the money supply (i.e., M1) in the U.S. has increased substantiallyfrom the end...

Answer To: FINC 310Money and Capital MarketsPhase 5 Individual Project AssignmentPoints Possible: 250As shown...

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