The simulations give rise to the impulse functions that describe the behavior of endogenous variables such as the monetary policy rate, change in real GDP and inflation over an extended period of time in response to the initial shocks. Figure 4, 5 and 6 display the impulse functions of R_t , (y_t ) ̃ and π_t with respect to the negative demand shock, particularly to the burst of housing bubble and corresponding reduction in a_t parameter. Figure 4 shows that the monetary policy responded to the shock by a sharp decrease in R_t followed by a gradual increase to prevent the economy from overheating. Reduction in R_t makes intuitive sense: since the negative demand shock reduced the output, the Fed lowered the real interest rate to stimulate investment and make up for the reduction in a_t parameter. It is also interesting to note that once the output gap turned positive, R_t began rising to keep output at the potential.
Consider one of the most influential theories in behavioral finance, Prospect Theory, which is developed by Daniel Kahneman and Amos Tversky with their published paper in 1979, investors value gains and losses differently. Losses have more emotional impact to investors than an equivalent amount of gains. Prospect theory states that people are risk-averse in the domain of gains and risk-seeking in the domain of losses; according to a more specific behavior pattern (fourfold pattern of risk, Tversky & Kahneman, 1992), people are risk-averse for gains with high probability but risk-seeking for gains with low probability, while people are risk-seeking for losses with high probability but risk-averse for losses with low probability (Tversky & Kahneman,
His observation on Great Depression arose from the lack of ability to boost the aggregate demand. During the crisis period, economy could not achieve full employment balance, the supply could not create its own demand. At this point the main argument of Keynesian theory on economic crises is that economical shrinkages are generally arisen from the huge drops in the demand. Aggregate demand refers to sum of all consumptions, investments and public expenditures. In his opinion, state should increase the aggregate demand by applying some fiscal and monetary policies.
In one of the studies done by The American Enterprise Institute for Public Policy Research (AIE), the researcher Peter Wallison stated, ―fair value, as applied by accountants in the current credit crunch, has been the principal cause of an unprecedented decline in asset values and an unprecedented rise in instability among financial institutions. The system has to be rethought, not only because of its contribution to financial instability but also because its pro-cyclicality tends to create asset bubbles and exacerbate the effects of their collapse. This is additional example of how much debate that fair value has contributed to a decline in the value of assets and the variability of financial institutions eventually leading to their failure. According to an article in The Wall Street Journal, ―banks generally loathe mark-to-market rules, which rely on what they feel are too often irrational market prices. The market value did fall excessively in the depths of the crisis.
A more detrimental impact on the current minimum wage in our economy is the inflation rates and the fact that inflation tends to reduce the populations purchasing power of money. According to input by McConnell, Brue, and Flynn, inflation is caused by an excess of total spending that exceeds a firm’s production volume (McConnell Pg 206). In other words, by raising the minimum wage and creating human stimulus, businesses can reach full employment and maximum output. Minimum wage affects inflation because inflation imposes a domino effect in overall economic health and success. Increased costs reduce supply resulting in less total output and employment cuts.
While some may see it as a blessing, others may see it as a curse. How can these minerals and oil reserves be a curse when they generate huge foreign exchange? These resources become a curse when they do more harm than good. This curse may come in the form of slow growth, a decline in her tradable sector due to the appreciation of her currency among others. In most cases, the new opportunity found is embarked upon at the expense of existing opportunities (goods that are exported by a country).
These connect the spot price of oil today to the value that market participants expect the price to be in the future. Just as the current price of a stock reflects what people expect about future earnings, making the actual change in stock prices very difficult to predict, the current price of oil should reflect expectations of future fundamentals, making changes in the price of oil hard to predict. The broad movements of the price of oil and oil futures contracts are consistent with these theoretical restrictions. The price elasticity of demand for oil (that is, the response of the demand for oil to changes in its price) is challenging to measure but appears to be quite low, Hamilton writes, and it seems to have declined over time. Income elasticity (that is, the response of the demand for oil to changes in income) is easier to estimate: for countries in an early stage of development it is close to unity, but it is substantially less than one in recent U.S.
In his book, The Great Crash 1929, John Kenneth Galbraith examines the stock market crash. He brought up ideas of buying on margins, bad banking structures and income inequality were considered as contributing causes of the crash. However, Galbraith argues that the speculations in the stock market were the main reasons, due to the wrong belief of gaining wealth through investing in current trends could make them rich without work, this belief strongly damaged the economy. Galbraith used a simple storytelling technique in a chronological order from people starting
Liquidity risk includes cash flow and market risk. • Commodity price risk Since oil is a commodity and its known that commodities are not “stable” Tullow can be affected by any change that might occur. Financial risk management strategy: • For the Foreign Currency Risk the company could use future contracts and option contracts, by using Sterling and US dollars the company can achieve long and short term financial needs. • For Credit Risk the company could use derivatives in order to better manage how much the wealth is.\ • For Interest Rate Risk the company could use interest rate swaps in order to better manage the exposure against variation in the interest rate. • For the Liquidity Risk the company could try to anticipate cash flows and hedging activities to better function through strong banking and equity relationships to certify cost.
The impact of commodity prices on share prices has been somehow overlooked. Empirical studies that touched this particular factor mostly focused on the impact of fuel prices volatility on stock market. In the same link, in a study of the impact of commodity prices on the Australian stock market ASX, (Heaton, Milunovich, Pass-de Silva, 2011) found that commodity prices are accounted for 9% of the variation of the stock market. To be more specific on this study, a review of the effect of commodity price impact on agriculture firms will be more appropriate. (Guo & Ma 2007) suggested that a sharp rise in prices of agricultural commodities would greatly restrict the rapid increase of farmers’ income.