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Chapter 16: Q.a For Critical Thinking (page 352)

Why do you suppose that corporate cash holdings have decreased slightly since 2015?

Short Answer

Expert verified

Corporate cash holdings have decreased slightly due to transaction cost motive, precautionary demand motive, agency cost motive, taxation motive

Step by step solution

01

introduction

Costs related to raising external assets are agent expenses and Invalid data. These exchange expenses might be fixed or variable, and the higher they are, the more essential the proportion of the affiliation's advantages it allocates to cash.

02

explanation part (1)

Firm ideal conditions from holding a portion of its benefits as money since it saves cash on exchange costs, combine. From the mark of a firm, there is a premium of holding a portion of its benefits as money to self-safeguard against the danger of liquidity disasters.

03

explanation part (2)

Management benefits by doling out a more significant proportion of the association's benefits for money than the monetary expert wealth intensification level since. Money is a basic essential to ensure procedures with exercises, yet extreme exchange assets might emerge about various issues which integrate; higher open door costs of holding money, money misuse, an instrument for getting the controlled self-expenses and the higher associated costs. There is a negative and insignificant straight association between improvement

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Most popular questions from this chapter

Consider the two panels of Figure 16-2. Suppose that instructions in the latest FOMC Directive call for a monetary policy action aimed at pushing down the rate of interest prevailing in the economy. Use the appropriate panel of the figure to assist in explaining whether officials at the Federal Reserve Bank of New York's Trading Desk should buy or sell existing bonds.

Consider the following data: The money supply is \(1 trillion, the price level equals 2, and real GDP is \)5 trillion in base-year dollars. What is the income velocity of money?

During an interval between mid-2010 and early 2011, the Federal Reserve embarked on a policy it termed "quantitative easing." Total reserves in the banking system increased. Hence, the Federal Reserve's liabilities to banks increased, and at the same time, its assets rose as it purchased more assets-many of which were securities with private market values that had dropped considerably. The money multiplier declined, so the net increase in the money supply was negligible. Indeed, during a portion of the period, the money supply actually declined before rising near its previous value. Evaluate whether the Fed's "quantitative easing" was a monetary policy or credit policy action.

Suppose that each 0.1percentage point increase in the equilibrium interest rate induces a \(5billion decrease in real planned investment spending by businesses. In addition, the investment multiplier is equal to 4, and the money multiplier is equal to 3. Furthermore, every \)9billion decrease in money supply brings about 0.1-percentage-point increase in the equilibrium interest rate. Use this information to answer the following questions under the assumption that all other things are equal.

a. How much must real planned investment decrease if the Federal Reserve desires to bring about an $80billion decrease in equilibrium real GDP ?

b. How much must the money supply change for the Fed to induce the change in real planned investment calculated in part (a)?

c. What dollar amount of open market operations must the Fed undertake to bring about the money supply change calculated in part (b) ?

Assume that the following conditions exist :

a. All banks are fully loaned up - there are no excess reserves, and desired excess reserves are always zero.

b. The money multiplier is 3.

c. The planned investment schedule is such that at a 6percent rate of interest, the investment is \(1200billion; at 5 percent, investment is \)1225billion

d. The investment multiplier is 3.

e. The initial equilibrium level of real GDP is \(18trillion.

f. The equilibrium rate of interest is 6percent.

Now the Fed engages in expansionary monetary policy. It buys \)1billion worth of bonds, which increases the money supply, which in turn lowers the market rate of interest by 1percentage point. Determine how much money supply must have increased, and then trace out the numerical consequences of the associated reduction in interest rates on all the other variables mentioned.

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