ECO 202 MOD 3 CA Essay Example | Topics and Well Written Essays - 1000 words - 1

ECO 202 MOD 3 CA - Essay ExampleQ3..For the past 3 years a major department store ambit has averaged approximately $10 billion in long-term debt. Their debt is in the form of bonds that have been sold to investing funds and the public (If you are not sure what a corporate bond is look it up on the internet). For the sake of argument, let us assume that either in a flash or one-year from now they will add an additional $5 billion to finance store expansion. This is a given, management has already made this expansion decision and it does not need to be commented on. The objective of management is to issue bonds at the lowest interest rate. Given this objective, should they issue the bonds now or wait for one year if they tincture the Federal Reserve will follow1. The Federal Reserve form _or_ system of government makers use monetary form _or_ system of government to influence demand and supply of money. Changes in demand and supply of money cause interest judge to fluctuate as i llustrated in the below diagramsTheFederal Reservecan set thediscount rate, as well as achieve the desiredfederal funds ratebyopen market place operations. These rates have significant effect on other market interest rates, but there is no perfect relationship. In the United States open market operations are a comparatively small part of the total volume in the bond market(monetary policy,Wikipedia,2011)Federal Reserve uses expansionary monetary policy to boost up economics activity in the economy and call in recessionary gap. An increase in the nominal money supply or a decrease in the demand for money results in excess supply of money. This change attempts to reduce money holdings by buying bonds and results in a mint if interest rates .Decrease in interest rate results in an increase in interest-sensitive expenditure and thence there is an increase in equilibrium real National Income.Opposite of expansionary policy is the Contractionary policy which is aimed to remove inflat ionary gap. A decrease in money supply or a n