Econ(1)(2).docx - 1 Heres a quote from Fed head Janet...

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1) Here’s a quote from Fed head Janet Yellen on at a meeting in Cleveland on July 10 this year. (see then click news and events…Regarding inflation, as I mentioned earlier, the recent effects of lower prices for crude oil and for imports on overall inflation are expected to wane during this year. Combined with further tightening in labor and product markets, I expect inflation will move toward the FOMC's 2 percent objective over the next few years. Importantly, a number of different surveys indicate that longer-term inflation expectations have remained stable even as recent readings on inflation have fallen. If inflation expectations had not remained stable, I would be more concerned because consumer and business expectations about inflation can become self-fulfillingExplain why the FOMC is concerned not only about actual recent inflation rates as measured by the CPI, but also about longer term inflation expectations remaining “stable”In particular, what is the problem if inflation expectations start to converge to an opinion that inflation will fall to “0” or less? 4ptsFor the economy, there is always needs to be a small amount of inflation. According to the Federal Reserve of the U.S., It is actually favorable for development of economy when prices rise 2 percent or less. It is for the reason that this mild inflation sets prospects that prices will keep on increasing. Consequently, it sparks increased demand for the reason that customers decide for buying now before prices increase in the future. By raising demand, economic expansion is derived by the mild inflation.
The relationship between unemployment rates and inflation is depicted by the Phillips curve. It isa vertical line that demonstrates that there is no enduring trade-off in the middle of unemployment and inflation in the long run. Though, the short-run Phillips curve is L-shaped forreflecting the initial opposite relation in the middle of the two variables. Inflation decreases with an increase in unemployment rate and vice versa.Particularly, investment in the economy my cut resulting in depression and recession when inflation expectation start to converge to an opinion that inflation will fall to zero or less.
2) Suppose the CFO of an American corporation with surplus cash flow had $100 million toinvest last July 15 and the corporation did not believe it would need to utilize these funds toretool or expand production capacity for 1 year. Suppose further that the interest rate on 1 year CD deposits in US banks was .5%, while the rate on 1 year CD deposits in England (denominated in British Pounds) was 2% at the time. Suppose further that the exchange rate at that time was $1.68 per British pound .A) Suppose that now a year later the exchange rate is $1.55 per US pound. What rate of return did the CFO earn on the investment in the British CD? (Note: a specific numeric answer is required for full credit.) 4pts.

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