The Fed

The Federal Reserve, otherwise referred to as "The Fed," is the arm of the government charged with maintaining the health of the economy. In order to operate a business, it is essential to have a basic understanding of how the Federal Reserve functions and how it influences the economy. Here are some resources you can use to learn more about The Fed.

You can find a quick tutorial at Investopedia.

The Federal Reserve Band of St Louis has a video you can watch here:

For a more humorous look at The Fed, check this out...

For a more technical explanation of open market operations, watch this:

Assignment:

After reviewing the materials above, write a paper answering the following questions:

1. What is the goal of monetary policy?

2. What are the three primary "tools' the Federal Reserve uses to control monetary policy?

3. Under what conditions would the Fed raise interest rates? What key indicators would the Fed look at when making this decision?

Title your paper "The Federal Reserve." Format you paper in 12 point Times New Roman, double spaced text. Submit your paper by the end of class. Answer the questions thoroughly using compete sentences. Your paper will be graded on the following scale:

Grammar, usage and punctuation 0-3 points
Formatting 0-3 points
Completeness of your answers 0-4 points

Total points 10

Math and Writing

Take your math and writing seriously. You'll need those skills when you go to college. Read this...

http://memphis.edu/admissions/math_writing.php

What is a Recession?

Think about the following questions: What are some things that can cause recession? What actions can governments take to help economies recover from recessions? What role does fear play in creating a recession? Are you confident or fearful of your future right now?

Here's a quick overview of the business cycle:

Assignment: Is the US economy growing or shrinking? Locate 3 articles on the Internet to find your answer. Analyze each article and write a brief summary. List your three URLs at the end of your paper. Write your paper in Google Docs, title it Economic Growth, and share it on your Google Drive. Use Times New Roman, 12 point, double-spaced format.Your paper is due at the end of class.

Discuss: Review the Fear and Greed index. What happens to stocks when investors are afraid? Last week, the fear index hit a rating of 5 which is "extreme fear." What do you think is driving investor fear despite a season of good earnings reports?

The Consumer Price Index - Investopedia

You can find additional information on the US Government's Bureau of Labor Statistics CPI FAQ here.

http://www.bls.gov/cpi/cpifaq.htm

Inflation

Now, to measure the prices of what the typical American pays for goods and services, we turn to the Consumer Price Index. Here's a brief explanation.

Promoting Economic Growth

Measuring the growth of anything begins with knowing it's size. Here's a quick recap of the concept of Gross Domestic Product (GDP).

Law of Supply

The video above will help you understand the Law of Supply. But what happens to products that people really need but can't afford such as drugs or healthcare. Should the government impose price controls to limit the prices drug companies can charge?

Read this article from the Cato Institute. What happens to supply when prices are set artificially low?

http://www.cato.org/publications/commentary/problems-price-controls

Read this September 23, 2014 article from the Wall Street Journal:

NEW DELHI—The Indian government Monday reduced the ability of the country's drug-pricing regulator to set prices on some drugs after pharmaceutical companies complained that a surprise round of pricing caps earlier this year was hurting the industry.
The National Pharmaceutical Pricing Authority is allowed to set the prices of what are deemed "essential medicines," which means the drugs that are most used by the general populace. The authority also had the right to set a ceiling price on other medicines in "extraordinary circumstances" if it was in the public's interest.
As of Monday, the pricing authority's ability to expand its control of prices in extraordinary circumstances was withdrawn. It is now only allowed to set prices on the hundreds of medicines that are on the essential list.
In July the pricing agency capped prices for more than 100 diabetes and cardiovascular medicines that weren't considered essential by the government, a move that surprised pharmaceutical companies and investors.
Shares of France's Sanofi SA (SAN.FR -1.79%) 's Indian subsidiary plunged 10% July 14 on news of the price controls. The company was one of the worst-hit by the caps as it is one of the largest sellers of diabetes and heart medicines in India, analysts said. At the time Shailesh Ayyangar, head of the French drug maker's India operations said that the company was "shocked and disappointed" by the price cuts.
On Tuesday, shares of Sanofi India Ltd. (500674.BY -1.00%) were up more than 12%.
The latest order—which was posted on National Pharmaceutical Pricing Authority's website Tuesday—removes the authority's extraordinary price-capping powers, but doesn't reverse the July price caps, said Dilip Shah, head of the Indian Pharmaceutical Alliance, a trade group.
After the July caps industry analysts and executives warned that attempts to control the price of too many drugs in India could hobble the industry and even hurt consumers in the long run as smaller pharmaceutical companies go out of business. Forcing global pharmaceutical companies to sell their popular products at rock-bottom prices might leave little business for India's generic drug companies.

"Several companies have started withdrawing their products that are under price control which means availability is going down," said Mr. Shah.
For example, after the government capped the price of antibiotic Augmentin, many generic companies stopped making it and the inventor of the drug, GlaxoSmithKline (GSK.LN -1.88%) PLC, saw its market share shoot up, said Mr. Shah.
"If GSK's product is available at the same price as generics, why would doctors not prescribe GSK's product?" he said.


Assignment: After reading the articles, answer the following questions. If price controls fail to bring costs down, why do government policy makers continue to use them? What happened in India when price controls were enforced? Re-read the Cato article. How could free-market forces be used to lower drug prices? Write your answers down in a handwritten paper or e-mail and turn it in for your daily grade.

The Law of Demand

The video above is a basic explanation of the law of demand. If you lower the price of something, demand will go up. For a more practical illustration of this. See the video below.

When price goes down, supply generally decreases, so a limited number of products are made available but demand is high. So what happens when demand out-strips supply? A shortage ensues. The greater the shortage, the higher the anxiety.

Private Property

The establishment of law to protect private property is fundamental to a country's growth. Without clear lines of property ownership, businesses cannot invest in capital goods and governments cannot invest in infrastructure. Read the following article on Haiti. Discuss the follow questions:

1. Why is it difficult to establish clear title to real estate in Haiti?

2. How do private property laws influence Haiti's ability to attract businesses?

Why Haiti Must Address Its Policies on Private Land Ownership 

Read this story about a proposed Russian Law.

Assignment: Write an analysis (hand written or e-mail) answering the following questions:

1. What does the law propose to do?

2. What is the motivation behind the proposed law?

3. How would the law affect current and future foreign investment in Russia? 

Nationalization vs Privatization

Nationalization takes place when a government takes over a privately held asset. When countries fall into communist hands, companies have no choice but to leave a country and turn over their assets to government officials.

Privatization often takes place in capitalist countries but not always. Privatization takes place when a government held asset is sold to a private company or individuals.

Sometimes, governments own monopoly companies which exploit natural resources owned by a country such as natural gas, oil or minerals. Governments also create government managed companies to operate utilities or serve a vital national interest.

Read this article concerning Pemex, a government run oil company in Mexico.Pemex has held a monopoly on oil drilling and exploration in Mexico. Recently, the Mexican government has opened up the country to oil exploration and drilling by private firms. Why do you think they are ding this? Do you think privatizing the oil industry would be a good idea?

Some have advocated privatizing healthcare in the United States. Read the following article. What do you believe is the strongest argument for universal healthcare? What is the strongest argument against it? Do you think it would be a good idea or not?

Assignment: After reading both articles above, write a typed or handwritten paper to answer the questions. Turn your paper in at the end of class.