Bank of Green is a mid-tier regional bank, focused primarily on consumer and small business lending. Historically the bank has funded its loans through traditional bank deposits. However, given the rapid development in convenience of mutual funds and online investing, the bank has shifted its focus offering a larger range of financial products and advice to its high-end customers. This included offering its own mutual funds, annuity and insurance products from other companies, and financial planning.
The purpose of this report is to provide a focus on spreading awareness about the current economical situation and planning an effective way to counter it. We need to come up with a strategy that is necessary for the Bank of Green. Our responsibility is to highlight aspects that need to be located and changed in order to achieve the current economical situation and counter the forecasted decline in the economy.
First, we analyzed the historical performance of the economy given by the Bank of Green. Using that data we compared the growth rates of the economy comparing them to the past years. Next, we provided our strategy that will be effective and what we expect the Federal Reserve to follow, using the aggregate demand and supply. Then, we looked into how it will affect the interest rates when there is a change in the money supply. In addition, we took into account how it will affect the investors that deal with Bank of Green.
We concluded if the Federal Reserve does implement action towards the weak economy, it will have a ripple down effect to any bank including the Bank of Green. A bank representative should be prepared to answer any questions that might arise during the day of work including the ones we have prepared in this report.
Economic Forecasting At Bank of Green Analysis
Introduction
In order to properly analyze and explain how Bank of Green should take immediate action to counter the forecasted decline in the economy we will look at the different factors that played into their decision making by:
Comparing 2006 data with historical data and comparing the growth rates since 1990.
Discussing the strategy the Federal Reserve to follow and predict what it will do and analyze strategy using aggregate demand-aggregate supply.
Discuss the impact change in money supply will have on interest rates and how the Fed will apply the change.
Deciding the effects on investors if the Federal government stepped in.
Applying strategic thinking unto their decision making.
In conclusion, we will make recommendations on how Bank of Green should conduct its future business with the declining economy.
Analyzing Data
Comparing the forecast for the Bank of Green for the year 2006 and analyzing it with the historical performance of the economy the data shows that GDP is higher than the past GDP's. If you look at the nominal GDP you can see whether hit by inflation or deflation it is still higher than the past GDP. If you take a look at the real GDP and compare it to the historical data, you will notice that the numbers began to lower slightly from the past, especially when you compare it to the year 2005 then it is lower but it is consistent with the 2000 years.
When looking at the set of data provided by Bank of Green and comparing the projected quarterly growth rates of the economy during 2006 with the average since 1990 we have used the percent change measure of GDP. This does explain why investors are concerned since in the past years the percent change has not been so far apart. As we calculated the expected rate of inflation for 2006 it came out to 7.4% which has not been so high since 1980.
Federal Reserve Prediction
The Federal Reserve gains its capital by loaning money to banks. Banks use the Federal Reserve as a "life-preserver", and receive these needed funds to loan out to the general population. Banks use what is called a money multiplier. This ultimately means that once they loan out these extra funds, they multiply it to reach a higher balance which is how the banks pay the Fed and essentially make money for themselves. It might come as a surprise, but the general public can predict or forecast when a recession will happen. There is so much information available to the public that all you really need to do is use any search engine and look up information regarding the economy and all other factors that would contribute to a recession.
In the event of a recession, the average person generally does two things. One, they keep all extra income themselves and decide not to invest their money in investment options in the economy. Or two, the event of the public being worried of the value of their money while being invested in things like the stock market, it is assumed that they will try to liquidate their investments as to not lose any value of the money they have committed. This is where the Federal Reserve becomes very important. The Federal Reserve has to react to these different changes in the economy and adjust to make sure that spending level does not drop. If this were to occur, the public will make sure to liquidate all of their assets in to cash causing a devastating blow to the economy.
The goal of the banks to ultimately achieve is to be able offer the lowest interest rates on loans as possible. Doing this will allow more people to receive these loans and invest their money in the economy. A way for these low interest rates to be possible is to increase the money that is being lent out by the Federal Reserve to the banks. Sometimes having this extra money in the hands of the consumer can be a bad thing. Demand will rise along with the price of goods as well. If people have more money to spend, they are bound to buy more products that will ultimately lead to a hike in price.
We will use the strategies of aggregate demand and aggregate supply to try and predict what the Federal Reserve will do to take action. The price levels of goods and services implement aggregate demand. That being said, when there is a decrease in price, it will ultimately lead to an increase in the demand of goods and services. This raises aggregate demand because if people have more money, they will invest this money and loan from banks to take advantage of these lower price levels and interest rates. Even though this sounds beneficial, it then changes the public's consumption level, which will then lead to inflation. As a result, aggregate demand will decrease. We have to take in to effect the long term when changing interest rate. Lowering the interest rates will increase aggregate demand in the short-run, but we have to remember how this will reflect on inflation. Unfortunately, in the long run it does indeed raise inflation leading to the decrease in aggregate demand.
When there is a decrease in money supply, there will be a decrease of price level. This will then cause there to be a decrease in quality output in the short run. This is because when you decrease money supply, the aggregate demand then decreases as well. The price that is expected or predicted will also shift the short run aggregate supply curve depending on increasing or decreasing the price level. One way for the Federal Reserve to fix this would be to increase the supply of money, which will then ultimately lead to an increase in the level of price. In the short run, the rate of output then decreases.
Changing the Money Supply and its Effects on Interest Rates
Money Supply:
The way the Federal Reserve will change the money supply is easy to explain yet complex to understand. The Federal Reserve, or Fed, can make it easier to borrow money from the banks. The easiest way to do this is to buy or sell bonds depending on what you want to do with the money supply. When the Fed buys bonds, it floods money into the banks and they can become more lenient on how they loan it out. When the Fed sells bonds, the banks have less money to distribute, thus tightening on the loaning. Another way the Fed can do this is by changing the reserve ratio. This gives the bank either more or less leverage on the cash reserves that they have. The last way that the Fed can control money supply is by offering banks a discount rate to borrow money. The banks get extremely cheap money and are more lenient in how they loan it out because of the price that they received the money. These methods to increase money supply are extremely volatile and changes in any of the three need to be carefully planned. Hundreds of banks are affected by the decisions of the Fed. It is illegal to change the rules for one bank and not the other. So if the reserve ratio is changed even by a slight number than the results can be enormous. And the same is true for any of the other methods to increase money supply.
Interest Rates:
Interest rates are directly tied to the current money supply. When there is more money in the open market, the interest rates are lower. The interest rates generally follow supply and demand unless the Fed sets a low, stable prime rate. Because most interest rates are tied to the prime rate, which is the rate that banks borrow money from the Fed, the prime rate controls the price of money to the general population. When the money supply is increased, there is more money to go around; therefore the interest rates are less. More banks are willing to loan out money which creates competition for customers. When there is less money in the market, customers tend to have trouble attaining loans. There are fewer banks which can even make loans since interests are high with less money available, and those banks have multiple customers asking for the same money. In a way it results in a bidding war and the bank has to depict which loans will yield the safest outcome, therefore loans are difficult to obtain with a poor economy. The money supply is the biggest tool that the Fed uses to control investment in new businesses and growth and expansion of existing businesses. The interest rates ultimately determine how much and how freely people borrow and invest money.
Interest's Change Effects on Investors
As previously mentioned, there are many different techniques the Federal Reserve could implement in order to counter a weak economy. If the Federal Reserve decides to flood the market with more money than the Bank of Green could expect a decrease in interest rates. This could cause many investors to invest less, and with lower interest rates means consumers will be less inclined to save and instead will spend more of their income. This means that the Bank of Green will largely lose much of their income from prospective investors and savers.
In contrast, lowered interest rates means more loans may be in thought of from growing corporations or individuals looking to spend big. Many individuals looking to purchase large goods such as a car, home, etc., will consider it when interest rates are lower than usual. They will be willing to take on loans since they will not have to pay such high interest rates on the goods they purchase. Also, with lowered interest rates corporations will be more inclined to invest in a production line machine or even company location. This means that they would be looking to take out large loans which could allow an increase in business for the Bank of Green. Whether good or bad the Federal Reserve acting in a weak economy will change how the Bank of Green will continue its daily functions.
Strategy Applied
The data provided by Bank of Green supports the connection the rate of increase in money supply has due to the increase in inflation rate. The data provided by Bank of Green shows the classical theory of inflation. A rate increase in money supply is going to cause a proportionate increase in inflation. The formula used by classical economists is: MV = PY. M represents the money supply in the economy, P is the price, and Y is the GDP. If we assume V, the velocity, stable, on a short period of time, the money supply will change very little. Also, if the velocity is stable, the change in money supply is proportional with the GDP.
The coefficient on the money supply variable shows how much the dependent variable is expected to decrease when the independent variable increases by one. The P-value represents the probability of obtaining a result as extreme as seen on the regression. Faster money growth does not cause inflation. Many people believe money growth causes inflation it is merely a misinterpretation of the formula MV = PY. There are factors that cause inflation such as shoe leather costs, menu costs, tax rate distortions, confusion and inconvenience, and redistribution of wealth.
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Conclusion and Recommendations
In conclusion, as a bank representative we encourage one to read over the following report. This report has included any possible questions a current client might have for the current status of the economy. In addition, we would encourage any bank clerk to study the economic forecast and any other possible outcomes the Federal Reserve may come up with in order to improve the weak economy.
