The federal reserve system Essay Example | Topics and Well Written Essays - 750 words

The federal reserve system - Essay Example The Federal Reserve, or the central bank, is among the most powerful economic institution in the United States of America. The Federal Reserve was given the power over regulation of the value of money by congress. In simple terms, the Federal Reserve came into being by enactment of the Congress. Consequently, the Congress has the obligation of overseeing the monetary policy and the Federal Reserve. This paper analyzes the importance of the Federal Reserve and strategy in stabilizing the economy of the country. The Fed System consists of a board of Directors, 12 regional bank branches in major US cities, and the Federal Open Market Committee (FOMC), the decision making unit of the Fed (Wells 19). The functions of the Fed are vital to the economy of the US as they play a major role in management aggregate demand, total spending, and most importantly, inflation. In the management of aggregate demand, the Fed applies relatively accurate counter-cyclical monetary policy to manage economic activities or aggregate demand. This translates to the essence of monetary policy in the business cycle; the recessions and booms are direct effects of monetary policy set in place. Ultimately, the stability economic activities depend on the stability of the monetary policies. The monetary policy upheld by the Fed also determines the inflation rate in the country. The government at times uses inflation to increase tax revenues thus reducing its debts. On the negative side, inflation disrupts the price system, thus affecting the free market economy. From these deductions, the lasting solution to inflation is stabilizing prices. This can be made one of the monetary policies of FOMC by the Congress. Another important role played by the Fed is that of being the lender of last resort. During crises, the Fed may increase the reserve or liquidity demand requirements thus automatically preventing liquidity shortages and stabilizing the economy. These liquidity reserves need to be adequate and available in economic crises. The Fed also influences the interest rates of major economic sector like automobiles, investments, and housing. The Fed, through its Federal open Market Committee (FOMC) unit, controls the economy of the nation through its monetary policy. Monetary policy is the strategy of either decreasing or increasing the supply of money to enhance a stable growth of the economy. The Fed, with the authority installed upon it in the Monetary Control Act of 1980, may influence the economy through its three main tools; reserve requirements, open market operation or interest rates (Wells 4). On the reserve requirement, the Fed may impose a reserve requirement ratio that is either lower or higher than the prevailing ratio, depending on the nature of the crisis. This rule applies to all the operational banks regardless of their membership to the Fed. An increase in the reserve ratio requirement decreases the supply of money in the economy, and vice versa. To understan d this concept, let us assume that the Fed has imposed a 10% reserve requirement on banks. This translates to 10% of all deposits made. Some calculations translate to ten times the amount of money created, or in general, 1/R, where R is the reserve requirement ratio. Since the banks require only 10% of the amount deposited by their clients for reserve, the actual deposit equals 10% of the number of loans the bank can create. Therefore, the number of total loans a bank can create equals to the actual deposit divided by the reserve requirement. The reserve requirement ratio is very powerful tool, and has only been used twenty two times in a period of 40 years. Nevertheless, the reserve ratio has been maintained at 50% since 1974. The discount rate is also biased by the FOMC for stability of the economy. Discount window is an economical term that refers to the Feds when it lends out money to banks, and the interest rate is known as the discount rate (as the banks turned assets in excha nge for cash). For

Event study Statistics Project Example | Topics and Well Written Essays - 1750 words

Event study - Statistics Project Example Market capitalization entails a multiplication of the total number that a company owns by the price of each share. With respect to the perspectives of the efficient market hypothesis and the PEAD, this paper aims at testing the PEAD phenomenon on a non-American market, Greek market. The paper considers the availability of 80 companies selected randomly for assessment on how PEAD affects the Greek market. The data for the 80 companies has been obtained from secondary sources especially the internet (Vaios). Considering available statistics, the Athens’ Stock Exchange a daily announcement of earnings effect on the markets. The data used in this paper considers four SUE portfolios based on events’ quoted prices as one method of testing the PEAD phenomenon and examination of whether market over and under reaction usually exist through the use of event study methodology. Finally, this paper also classifies the sample firms regarding their response or exposure to the PEAD phenomenon. In this paper, the selection of the used sample was based on the consideration of all companies listed in the ASE. Out of the 264 firms listed in the ASE, 80 were selected from which their reporting of earnings from the year 2001 to 2008 (Vaios). Among the data sets that will be considered in this case include the quarterly earnings per share, corresponding announcement dates of the quarterly returns per share, and the closing prices of the stocks (Brown and Warner, 328). Besides the random selection of the companies, all without quarterly earnings per share were excluded (Vaios). The exclusion in this case involves the dates of announcements and, therefore, the consideration of annual returns per share as this would not show the major changes that occurred after each announcement. For instance, considering that positive announcements can affect markets for as long as 40 days in the Greek market, it is clear that annual EPS may not reflect any major