ASSIGNMENT
Scenario
After experiencing a few years of some modest success, your company (Indiana, Inc.) wants to expand operations, but it needs to borrow a considerable sum of money from its commercial bank to do this. In this regard, it has been determined that borrowing will be undertaken within the next few weeks if the interest rates are reduced from their current level, but borrowing will be delayed if the interest rates remain the same or are increased from their current level. The bank always follows the lead and direction of the Federal Reserve when it comes to the interest rates it charges for loans, so analyzing what the Federal Reserve does is crucial to making the right decision to borrow now or borrow later.
Below are three separate hypothetical actions that the Federal Reserve could take that would impact the commercial bank’s interest rates. Follow the specific directions for each hypothetical, and respond to each one in separate paragraphs. Also number your paragraphs to coincide with the number of each hypothetical you are writing about.
The Federal Reserve has decided to sell treasury bonds on a regular basis over the next few weeks. Identify by name and describe in detail the specific tool that is being used by the Federal Reserve, and then based on what it is doing, explain whether you would recommend borrowing at this time or waiting until later, and explain why.
The Federal Reserve has just advised the commercial banks that it must increase the percentage of money it keeps in its vaults from 10% of all deposits to 12% of all deposits over the next few weeks. Identify by name and describe in detail the specific tool that is being used by the Federal Reserve, and then based on what it is doing, explain whether you would recommend borrowing at this time or waiting until later, and explain why.
The Federal Reserve has just lowered the interest rate that it charges commercial banks that seek to borrow money directly from the Federal Reserve from 5% to 4%, and this will remain in effect over the next few weeks. Identify by name and describe in detail the specific tool that is being used by the Federal Reserve, and then based on what it is doing, explain whether you would recommend borrowing at this time or waiting until later, and explain why.
