Determining Rates of Interest in the Money Market

Determining Rates of Interest in the Money Market Explain in detail how interest rates are determined in the money market. Examine the likely consequences for the macroeconomy of a reduction in the rate of interest and highlight the factors that might limit the effects. This essay is going to demonstrate how the rate of interest is determined in the money market. It will examine the impact that a reduction in the interest rate has on the economy. The framework used will be the interest rate mechanism, where an increase in the money supply will change interest rates and stimulate interest-sensitive expenditures. It will then highlight the factors that can limit and offset the effects of a reduction in the interest rate. The interest rate is defined by Sloman et al. (2012) as the price paid for borrowing money. Two factors that determine the interest rate is the supply of money and the demand for money. The supply of and demand for money in the economy interact together to reach a level of equilibrium. According to Sloman et al. (2012) the money market is a market for short-term debt instruments in which financial institutions are active participants. Figure 1 and 2 illustrates the money market and the demand for money. The demand for money refers to an individual’s desire to hold their wealth in the form of money instead of using it to purchase goods or financial assets. The money demand curve is downward sloping as an increase in the interest rate leads to a decrease in the quantity of money demanded. Money supply is the entire stock of currency and other liquid instruments in the economy. The money supply is set by the central bank (Bank of England) and is exogenous (does not depend on the demand for money). The money supply is fixed and is not influenced by the rate of interest. In figure 1, the x-axis measures the money supply, the y-axis represent the rate of interest and the L curve represents the liquidity preference curve (demand for money). The money supply is represented by the vertical line Ms. The intersection of the money supply and money demand curves reveals the equilibrium rate of interest and is fixed at that point where they equate. According to Keynes the intersection of the curves is purely a monetary phenomenon. John Maynard Keynes (1936) in his book the General Theory of Employment, Interest and Money described the demand for money through liquidity preference framework. According to this theory, the primary reasons for holding money are for transactional, precautionary and speculative demands. The sum of all three demands make up the total demand for money. According to the theory, if interest rates are high individuals demand for money (liquidity preference) is low and when interest rates are low, the demand for holding money increases. In figure 2, the curve L1 is the transaction plus precautionary demand for holding money. L stands for the liquidity preference and by definition; the liquidity preference is the demand for holding assets in the form of money. L is the total demand for money balances and is derived by the horizontal addition of curves L1 (the transactions plus precautionary demand for money) and L2 (the speculative demand for money). The shift from L1 to L2 illustrates a s hift in the liquidity preference (an increase in the demand for holding assets in the form of money). The interest rate mechanism is graphed in a three-stage process. Stage 1 illustrates the money market, where an increase in the money supply from M to M’ (with everything else being equal) leads to a fall in the rate of interest from r1 to r2. At stage 2, the fall in the interest rate leads to an increase in the level of investment from I1 to I2. The increase in the level of investment translates in the third diagram shown in stage 3. Lower interest rates increases investment as it becomes relatively cheaper for firms to invest and businesses to take out loans to finance greater spending and investment. Stage 3 shows how a rise in investment leads to a multiplied rise in the national income from Y1 to Y2. Stage 3 shows the Keynesian withdrawals and injections function where an increase in investment has increased the level of injections J1 to J2. This excess in injections over withdrawals will lead to a rise in the national income from Y1 to Y2. Interestingly, an increase in t he level of income means that consumers will have more disposable income for consumption purposes (Sloman et al. 2012). Consumption is the largest component of aggregate demand and has an effect on other components of aggregate demand such as net exports and investment Griffiths and Wall (2007). Lower interest rates increases the level of consumption by making the opportunity cost of consumption is lower. This encourages greater expenditure as borrowing through credit cards becomes cheaper. Lower interest rates makes saving less attractive by reducing an individual’s incentive to save. This lower incentive to save encourages consumers to spend rather than to hold onto money. It also reduces the income from savings and the interest rate that is due on loans taken out. However, borrowing now becomes more attractive and this stimulates an increase in spending. Lower Interest rates can boost the prices of assets such as shares and houses. Higher house prices means that current home owners must extend their mortgages which further enables them to finance higher consumption. Interestingly, the higher asset prices increases the wealth of households (through the wealth effect) which increases their incentive to spend as confidence will be higher. Higher asset prices means that businesses are also able to finance their investment (purchase of capital) at a lower cost. Lower interest rates also reduces the cost of interest payments on mortgages by reducing the monthly cost of mortgage payments. This increases the disposable income of householders which increases their level of spending. Moreover, lower interest rate can reduce the value of the Pound Sterling. If UK interest rates fall relative to overseas, saving money in UK becomes less attractive as higher returns can be earned in another country. This reduces the demand for the pound sterling and causes the reduction in the value. In figure 6 at stage 2, the fall in the currency is due to a decrease in the demand for the Pound Sterling in the foreign exchange market. The rise in the supply of the domestic currency from S1 to S2 leads to a fall in the demand for the currency from D1 to D2 and this causes a depreciation in the exchange rate from er1 to er2. This fall leads to a rise in the demand for exports as UK exports become relatively cheaper and more attractive overseas. There will also be a fall in demand for imports (as they become more expensive) and thus causing an increase in the national income (which further increases spending). What if other factors can offset the full extent of a reduction in interest rates? There exist time lags in the economy that can limit the impact of rate cuts on the level on interest-sensitive expenditures. In figure 4, the increase in the money supply lead to a multiplied effect and resulted in a rise in the national income. However, the mechanism failed to highlight how a rise in income will also lead to a rise in the transactional demand of money (L1). In this circumstance, at stage 1, L1 would shift to the right and thus lead to a smaller fall in the interest rate than illustrated. Thus, the level of investment at stage 2 and the national income at stage 3 will not rise as much as shown as well. The overall effect of the money supply on national income will depend on the size of each stage. Their relative sizes depend on the shapes of the liquidity preference and investment curves (as in figure 6 and 7). A bigger change in the interest rate will be caused if the liquidity prefer ence is less elastic. The more interest-elastic the investment curve is, the bigger the change in investment. If the marginal propensity to withdraw is lower and therefore the curve is flatter, this will cause a bigger multiplied change in the national income than illustrated (Sloman et al. 2012). Keynesian economists stress how volatile stages 1 and 2 are in the interest rate mechanism. What if increasing the money supply leads to no interest rate reductions? What if investment is inelastic and cannot be influenced by changes in rates. Figure 6 illustrates an elastic liquidity preference curve. The less elastic the liquidity preference is, the bigger the change that will be caused in the interest rate. Due to its gently sloping curve, a rise in the money supply from M to M’ will lead to an only small fall in the interest rate. This will them limit the impact that the interest rate has on consumption, saving decisions and any other interest-sensitive expenditures. According to Keynesians, the demand for money (L) can be very elastic in response to changes in the interest rates and the liquidity preference curve can become relatively flat. The full effect of a rate cut can be limited greatly by the nature of the demand curve. At r2, if individuals perceive and expect no further rate cuts, any increase in the money (from M’ to M’’) will have no impact on r. The liquidity trap is where Keynes believed this additional money will be lost in. within this theory, interest rates have a floor where an increase in the money supply has no further impact. The financial crisis 2008-09 was a predicament where policy makers feared that increases in the money supply will lead to idle balances lost in the liquidity trap. The central bank used an unconventional monetary policy known as quantitative easing, where they deliberately increased the base rate via the purchase of bonds and other securities in exchange for money. This process of credit creation was used to increase bond prices and thus reduce the interest rate and stimulate growth. Arguably, increases in the money supply will have some impact on the rate of interest as we have seen in the financial crisis where deliberate increases in the money supply lead to further increases in the i nterest rate and thus spending as well (Sloman et al. 2012). Figure 8 illustrates the effect on interest rates of an unstable liquidity preference curve. This figure further explains how the liquidity preference curve fluctuates due to factors such as expectations in the inflation rate and direction of the interest rate (to name a few). Therefore, due to its instability it is difficult to predict the effect on interest rates of a change in the money supply. Another factor that can influence the investment schedule are changes in investor confidence. An increase in investor confidence can shift the investment curve to the right and at any given interest rates, firms will want to invest more. A decrease in their confidence would shift the curve to the left. If investors believe that the economy is going to get out of recession, their confidence and level of investment will increase. If firms believe that inflation will rise and that the central bank will soon increase the interest rate, confidence and investment in the economy will be low (Sloman et al 2012). In Figure 7, a bigger change in investment will be caused if the investment curve is more interest-elastic. In the liquidity preference framework, investment demand is unresponsive to interest rate changes and that a large change in the interest rate is detrimental to affect investment. Evidence to confirm this was illustrated through the impact of investor confidence. This consensus on the behaviour of investment can be argued in that the focus should be more on how volatile and erratic investment is in response to confidence than its responsiveness to the interest rate. For example, in figure 9, the impact of a fall in interest rates is limited by business confidence. Initially, the reduction in the interest rate has increased investment. However, if the fall in interest rates is accompanied by an increase in business confidence by investors, the investment curve will shift from l1 to l2. On the other hand, if the fall in the interest rate is accompanied by a decrease in confidence then the investment curve will decrease and fall shift from l1 to l3. This impact is contrary to what was illustrated when the investment curve was believed to be inelastic. Therefore, expansionary monetary policy is likely to be more effective if firms have confidence in its effectiveness (Sloman et al. 2012). In the liquidity preference framework, the assumption is that an increase in the money supply leads to lower interest rates if everything else remains equal. However, in reality an increase in the money supply might impact other factors in the economy that could increase the interest rate instead of decreasing it. Two factors to highlight are the income effect and the price-level effect. The income effect describes how an increase in the money supply has an expansionary influence on the economy and this in effect raises the national income and wealth. The liquidity preference theory predicts that an increase in the national income and wealth will increase the interest rate and offset the original impact of an increase in the money supply. Another effect that can limit the impact of a reduction in interest rates is the price-level effect. In this effect, an increase in the money supply increases the overall price level which also increases the interest rate. In conclusion, economics is a social science where theories are constantly examined and redrafted. In the interest rate mechanism theory, an increase in the money supply will lower interest rates and stimulate interest-sensitive expenditures. This stimulation will have a multiplied effect on the level consumption, business investment, mortgage payments and asset prices. However, the impact of a reduction in the interest rate on the economy is quite a complex subject to address. Many determinants must be factored in for the full impact to be noticeable. Even if the overall effect of a reduction in the interest rate is quite strong, it is highly unpredictable to measure and estimate the magnitude of it. Investment is influenced by confidence and on elasticity to the interest rate. This changes the original impact of a rate cut. The nature liquidity preference curve can be highly unstable and not be impacted by any changes in the interest rate. There also other factors like the price-le vel, expectations and income that can impact and offset the intended purpose of an increase in the money supply. All the factors highlighted in this essay can limit and offset the impact of a reduction in interest rates on interest-sensitive expenditures and the growth of the economy. REFERENCES Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, CreateSpace Independent Publishing Platform Griffiths, A. and Wall, S. (2007) Applied economics, 11th ed. Harlow: Addison Wesley Longman. Sloman, J., Wride, A. and Garratt, D. (2012) Economics, 8th ed. Harlow: Pearson Education Limited. BIBLIOGRAPHY http://www.bankofengland.co.uk/monetarypolicy/Pages/overview.aspx http://www.macrobasics.com/chapters/chapter8/lesson83/ http://harbert.auburn.edu/~thommsn/FINC-3700/ME7-WebChapters/WebApp04_4.pdf http://www.stlouisfed.org/publications/re/articles/?id=2505 http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb120104.pdf https://www.creditwritedowns.com/2010/10/on-liquidity-traps-and-quantitative-easing.html

How do Heaney and Plath present their feelings in the blackberry poems? Essay

The two poems â€Å"Blackberrying† and â€Å"Blackberry-Picking† are similar in the sense of description of the blackberries. Both Sylvia Plath and Seamus Heaney present this fruit in a positive light, using thorough detail and both displaying their love for the blackberries with admiration. They are very similar in using strong and powerful language creating illusions and vivid images, almost making us feel as if we were experiencing this ourselves. Both of these poems start off describing Plath and Heaney’s lust for the blackberries and how much satisfaction the fruit gives them, but then both writers display their feelings about how everything changes and how this temporary happiness doesn’t last suggesting that life is not all pleasant. In the poem â€Å"Blackberrying†, by Sylvia Plath, the language is extremely effective, portraying a major change in tone. The first stanza tells us about Plath’s love for the blackberries. In the first three lines, she expresses her awareness of her surroundings and how amazed and content she is, with all this fruit around her. She does this using the word â€Å"blackberries† a number of times. This repetition is powerful as it stresses her enjoyment. She uses â€Å"dumb† and â€Å"thumb† as rhyming, to create a bigger visual image of the blackberries, representing the way they are viewed by her. She makes these blackberries sound sumptuous, luscious and juicy, making us crave them and making them sound mouth-wateringly tasty, by saying â€Å"Fat with blue-red juices† The lines â€Å"I had not asked for a blood sisterhood: they must love me†, show us that she is quite desperate and lonesome, that her blood sisterhood should be with these berries, not humans, and shows us the femininity of nature. â€Å"They must love me could be could be telling us how the blackberries show their love to her by leaving their juice on her fingers, being all that loves her maybe. This personifies nature as a female force, acting as her companion. In the second stanza, negative repetition us used, suggesting Plath is crying out for help, such as â€Å"nothing, nothing† and â€Å"protesting, protesting†. This stanza gets ready for the third, telling us that something unpleasant has come about, which is the flies, a visual image of them. They have become drunk on the juice of the berries. The flies are made to sound light, delicate, and beautiful, as â€Å"they believe in heaven.†, suggesting Plath does not. The last stanza of the poem represents finality, which we presume Plath may be talking about ending her life, when she says â€Å"The only thing to come now is the sea.† Plath uses onomatopoeia with â€Å"slapping its phantom laundry in my face.† It is effective as it shows the wind as harsh and abrupt. The poem is about nature at the start, and its is warm and loving toward the blackberries, but in the end, she uses the phrase â€Å"beating and beating at an intractable metal† as a sign of death, and being trapped in her life. The berries and juice are compliant In the poem â€Å"Blackberry-Picking† by Seamus Heaney, a descriptive and detailed account of picking blackberries is given. He uses many adjectives to do with colour to make the picture seam more real, tasty and ready to eat, such as â€Å"glossy purple clot†, and â€Å"red, green, hard as a knot.† This appeals to the reader in a sense that we want to read on and we are amazed at the language. This poem is contrasting, as in the first part, Heaney uses words such as â€Å"glossy† and â€Å"sweet flesh†, and the second part uses â€Å"fur† and â€Å"rat grey fungus† which sounds ugly and uninviting. The poem is really telling us about life in general. The feeling of getting our hopes up, and the disappointment that we experience in our daily lives. Being so joyful and enthusiastic about something one moment, and distraught and unhappy the next. The first stanza describes the sumptuous berries, and the second is describing how he plans to keep them, and the third leads to the disappointment that is faced. Heany transforms a normal fruit into a magical delectable act of nature, using the word â€Å"lust† which displays a strong desire for the fruit. He demonstrates this enthusiasm by naming all the different containers in the sense that they were picked out carelessly and without any thought absent mindedly in a very eager state. The ending of the poem shows us that there are always disappointments in our lives, and things that we have to be aware of, and that life isn’t all sweet. The phrase â€Å"Each year, I hoped they would keep, but knew they would not,† is telling us that Heaney got his hopes up, but a small part of him knew that in the end he would be let down.

Literature questions

1. What is the nature of Feudal society in the Middle Ages? How might Aquinas’ concept of Natural Law reflect the more general medieval belief in hierarchy and a hierarchical universe? How does Dante’s Inferno also reflect the medieval belief in hierarchy? In other words, how does the poem structure the punishment of sin in relationship to God’s love (or its absence)? Provide two examples to illustrate this relationship, one early, one late, to show the change as we descend. The nature of Feudal society in the Middle Ages was very much that the roles of people of various classes were very much defined. The feudal lords would rule over the peasants and each person’s role in society was defined by his rank and his birth. The concept of Aquinas’ Natural Law philosophy reflects the more general medieval belief in hierarchy and hierarchical universe because this philosophy implies that there is a natural state of things; for example, the poor should be beneath the rich. Also, the concept of what is right versus what is wrong is part of this Natural Law. This idea is evident in the beliefs of the medieval period and within that particular society. In literature this belief is also reflected, such as in Dante’s Inferno, a poem that deals with hell and damnation. In this literature the medieval belief in hierarchy is connected to the idea of man’s sin. The idea of purgatory is important to the medieval belief in hierarchy because it leads one to believe that there is a natural order in the universe as well as on earth. Just as the main character in Dante’s Inferno must go through various stages of hell and purgatory before he can be reconnected with God’s love, so is this seen on earth in earthly institutions and society. 2. What are the key features of Renaissance Humanism? How does it view the capacities of humanity in distinction to the views of the Middle Ages? How might Shakespeare’s Much Ado About Nothing reflect the new Renaissance view of humanity? Renaissance humanism is a philosophical movement that put a great deal of emphasis on what mankind can accomplish. In direct contradiction to the traditional Christian beliefs in Europe at the time, which focused on the sinfulness of mankind and that he was nothing without God, the humanist movement steered people towards the liberal arts and the humanities in hopes that the potential of mankind could be appreciated. This philosophy was almost heretical because it places such an emphasis on beauty, art, and humankind and not completely on God. While the Middle Ages saw all things that mankind accomplished as being, by nature, sinful because of the sinful nature, humanism was all about appreciating what mankind can accomplish. In â€Å"Much Ado About Nothing† by William Shakespeare the ideals of humanism are definitely reflected because of the strong emphasis on the arts and the importance of the individual as opposed to the group. In this play we see a lot of elements that are a precursor to the Romantic era, with the relationships between the lovers and the way that each of the characters interacts with each other. 3. How does the Enlightenment tend to view mankind and society? What do these thinkers believe will promote progress, happiness, and justice? How does Voltaire’s Candide both express and critique these Enlightenment assumptions? The Age of Enlightenment was a time when people were beginning to reexamine the accepted ideals and beliefs of times past. It was a time of reason, when they began to really look for their own answers and not relying solely on the Church to tell them what to believe, or the monarchs. The Enlightenment viewed mankind and society as having free will, not having innate virtues given to them automatically by God. Society was supposed to help create equality, liberty, and fraternity, and even accepted forms of government were reexamined. The thinkers of the Enlightenment believed that true progress, happiness, and justice could only be achieved by creating societies that nurtured mankind’s search for reason and establishing equality among people. In Voltaire’s Candide the writer shows the audience the transition from the beliefs of the Middle Ages to the Enlightenment in the difference between the attitudes of two of the characters. In this story Pangloss sees the world as being naturally right, while Candide feels that it is not fate that makes a persons life, but their own actions. This idea is seen throughout the story of these two characters as they progress through El Dorado, where gold is not worth anything because there is so much of it. This idea is also very rational in nature and reflects the Enlightenment view. 4. How does the Romantic movement represent a revolt against key Enlightenment values? How might Emily Bronte’s Wuthering Heights express some reservations about some extreme Romantic assertions, particularly about the passions of the â€Å"natural† self as opposed to the artificial constraints of civilization? The Romantic movement represents a revolt against key Enlightenment values because it was during this period that there was a shift in values and core beliefs from the logical and rational emphasis of the Enlightenment to a period that focused more on the natural passions of each individual person. While the Enlightenment focuses more on the head, the Romantic period definitely was all about the heart, and people projected that shift in values through their art and writing. Everything about the Romantic period challenged the view that science, reasoning, and society were what needed to dictate one’s actions. Instead, the focus should be on one’s own wants and needs. In a novel like Wuthering Heights, written during the Romantic period, these extreme Romantic assertions were even challenged. In this novel the characters are fighting with their inner passions and their natural selves. The love story between Heathcliff and Catherine is a perfect example of a Romantic relationship: she’s rich, he’s poor, and he is very much the antagonistic type of character and yet she loves him because of what is in her heart. While the Romantic period was all about opposing the artificial constraints of civilization and not worrying about what society dictates but instead depending on their own feelings to dictate them, this novel challenges this by posing questions about whether or not the relationship between these two main characters is really a good one. 5. Andre Gide’s Straight is the Gate, published in 1909, is set in the period just before World War One: in other words, at a time when it was still possible to hold nineteenth-century ideals. Even though Gide was unaware of the catastrophe about to fall on Europe, he still seems to sense that there is something wrong with the bourgeois world of the age. What does the story suggest is wrong with this pre-war world? How might Gide be classified as a modernist? In Andre Gide’s Strait is the Gate seems to suggest that there are problems existent in the pre-war world of Europe, mostly having to do with the bourgeois world of the age and the way that people viewed each other. This story at first glance is a love story that deals with the way that dedication to God can change the way people relate to each other, particuarly in the relationship between Alissa and Jerome, but it shows that the Romantic ideals of the 19th century were still being held onto by many people in Europe. Gide can be classified as a modernist because his style was very modern but, more importantly, his themes were modern in that he was a humanist that was moving away from the 19th century beliefs that were prevalent at the time and dealing with issues in society, especially issues dealing with homosexuality and challenging religious beliefs.

An Overview of the Motorcycles History

Like many inventions, the motorcycle  evolved in gradual stages, without a single inventor who can lay sole claim to being the inventor. Early versions of the motorcycle were introduced by numerous inventors, mostly in Europe,  in the 19th century. Steam-Powered Bicycles American Sylvester Howard Roper (1823-1896) invented a two-cylinder, steam-powered velocipede in 1867. A velocipede is an early form of a bicycle in which the pedals are attached to the front wheel. Ropers invention can be considered the first motorcycle if you allow your definition of a motorcycle to include a coal-fired steam engine. Roper, who also invented the steam-engine car, was killed in 1896 while riding his steam velocipede.   Around the same time that Roper introduced his steam-powered velocipede, Frenchman Ernest Michaux attached a steam engine to a velocipede invented by his father, blacksmith Pierre Michaux. His version was fired by alcohol and twin belt drives that powered the front wheel.   A few years later, in 1881, an inventor named Lucius Copeland of Phoenix, Arizona developed a smaller steam boiler that could drive the rear wheel of a bicycle at the amazing speed of 12 mph. In 1887, Copeland formed a manufacturing company  to produce the first so-called Moto-Cycle, though it was actually a three-wheeled contraption.   The First Gas-Engined Motorcycle Over the next 10 years, dozens of different designs for self-propelled bicycles appeared, but its widely acknowledged that the first to use a gasoline-powered internal combustion engine was the creation of German Gottlieb Daimler and his partner Wilhelm Maybach, who developed the Petroleum Reitwagon in 1885. This marked  the moment in history when the dual development of a viable gas-powered engine and the modern bicycle collided. Gottlieb Daimler used a new engine invented by engineer  Nicolaus Otto. Otto had invented the first Four-Stroke Internal-Combustion Engine in 1876, dubbing it the Otto Cycle Engine As soon as he completed his engine, Daimler (a former Otto employee) built it into a motorcycle. Oddly,  Daimlers Reitwagon did not have a maneuverable front wheel, but instead relied on a pair of outrigger wheels, similar to training wheels, to keep the bike upright during turns.   Daimler was a prodigious innovator and went on to experiment with gasoline motors for boats, and he also became a pioneer in the commercial car manufacturing arena. The company bearing his name eventually became Daimler Benz—the company  that evolved in the corporation we now know as Mercedes-Benz. Continued Development From the late 1880s onward, dozens of additional companies sprang up to produce self-propelled bicycles, first in Germany and Britain but quickly spreading to the U.S.   In 1894, the German company,  Hildebrand Wolfmà ¼ller, became the first to establish a production line factory to manufacture the vehicles, which now for the first time were called motorcycles.  In the U.S., the first production motorcycle was built by the factory of Charles Metz, in Waltham, Massachusetts.   The Harley Davidson Motorcycle No discussion of the history of motorcycles can end without some mention of the most famous U.S. manufacturer, Harley Davidson.   Many of the 19th-century inventors who worked on early motorcycles often moved on to other inventions. Daimler and Roper, for example, both went on to develop automobiles and other vehicles. However, some  inventors,  including William Harley and the Davidsons brothers, continued to exclusively develop motorcycles. Among their business competitors were other new start-up companies, such as Excelsior, Indian, Pierce, Merkel, Schickel, and Thor. In 1903, William Harley and his friends Arthur and Walter Davidson launched the Harley-Davidson Motor Company. The bike had a quality engine, so it could prove itself in races, even though the company initially planned to manufacture and market it as a transport vehicle. Merchant C. H. Lange  sold the first officially distributed Harley-Davidson in Chicago.