The rational expectations theory is often used to explain expected rates of inflation. For example, if inflation rates within an economy were higher than expected in the past, people take that into account along with other indicators to assume that inflation may further increase in the future. The rational expectations theory also explains how producers and suppliers use past events to predict future business operations. If a company believes that the price for its product will be higher in the future, for example, it will stop or slow production until the price rises. Since the company weakens supply while demand stays the same, the price will increase.
(1999) and Poteshman & Serbin (2003) state that attaining new highs in stock prices is a significant reference price in employee stock options and standardized exchange traded stock options respectively. Furthermore, Grinblatt & Keloharju (2001) and Kaustia (2004) find that new highs and lows of the past month are both important reference prices. In this paper I inspect the effect of different reference prices. The results are consistent with Kaustia (2004), which shows the relative importance of maximum and minimum stock prices as reference prices. Attaining new highs and lows over the previous month can increase the daily turnover significantly as similar as the results of Kaustia (2004).
Influence of inflation on growth velocity of the money explained due to the fact that buyers increase their purchases in order to protect themselves from the economic losses owing to the decrease in purchasing power of money. The coefficient of monetization The important indicator of status of money supply step forth the coefficient of monetization that is equal to: C=M2/GDP The coefficient of monetization permits to answer if there is enough money in circulation. It shows how much GDP provided with money (or how much money is there for $ GDP). In developed countries this coefficient come to 0,6 or even close to
This means as employees’ nominal wages increase with inflation their real wage (purchasing power of nominal wages) may remain constant. Since inflation reduces the incentive for households to save, it causes a shortage of savings for firms to borrow. Firms finance investment (the purchase of new capital goods) by borrowing money. Therefore, if there is not saving funds for investment will
Activity I: a. the bank 's specific cash market risk is dependent on the increase in the interest rate because the interest rate in the futures market is a function of the interest rate in the cash market. It is calculated as follows: Cash Market Risk = 10000000 * 0.0461*(90/365) = $113,671.23 To hedge against the borrowing costs, the bank should sell Eurodollar futures because the futures interest rate is up trending. By doing so, any increase in the cash market interest rate would be matched in the futures market interest rate to offset any gain or loss on the scheduled issue of Eurodollar futures b. The best futures contract for the bank to use is June 2009 because it has the higher interest rate of 5.38%. The profit on the futures trade is calculated as follows: Profit =
It is the rate at which depository institutions borrow and lend from one another in the federal funds market. The FOMC’s open market operations lower the rate by increasing the reserves supplied to the economy, or alternatively, raise the rate by reducing the supply of balances. Due to a term structure of interest rates, the changes in the short-term interest rates are transmitted to the long-term interest rates since the financial markets expect the changes to persist for an extended period of time or assume that they convey information about the future monetary policy. Also, the inflation inertia ensures that the change in the federal funds rate effectively influences the real interest rate which is equivalent of the cost of borrowing. By altering the cost, federal funds rate indirectly affects the spending and investment by households and businesses, which on their turn, impact output and inflation in the economy.
• Lower Government Acquisitions: Economic growth makes higher assessment incomes and there is less need to use funds on profits. For example, unemployment benefits. Subsequently, it serves to diminish obtaining. Likewise, it assumes a part in decreasing obligation to GDP degrees. DISADVANTAGES Long term financial development puts an awful effect on the inhabitants of any nation.
So a higher interest rate is always implying a lower net interest income. The interest rate risk can be divided by refinancing risk and reinvestment risk. Refinancing risk is “the costs of rolling over funds or reborrowing funds will rise above the returns generated on investments” (Cornett, Lange & Saunders 2013). A downgraded bank usually pays for higher funding costs reducing returns on investments (Drehmann, Sorensen & Stringa 2008). The other classification, reinvestment risk means “the returns on funds to be reinvested will fall below the cost of funds” (Cornett, Lange & Saunders 2013).
Recent evidences by economists shows that initially the long-run average cost falls rapidly but after a point it remains even or at its right end it may even slope gently downward. Joel Dean (an economist best known for his contributions to Corporate Finance theory and particularly to the area of Capital budgeting) in his cost function studies finds that long run average cost curve is L-shaped. The reasons for the LAC curve being L shaped are as follows
This cost will then be absorbed by firms or more likely be passed on to consumers in the form of higher prices. This is an example of cost-push inflation. Such inflation erodes income gains associated with minimum wages, while causing aggregate demand levels in the economy to decline (DPRU, 2008). Shadow labour markets may develop Since minimum price is set above market clearing prices, shadow markets are likely to develop. This is because at the minimum price there is a surplus of labour.