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    Consumer Theory, FED Selling Short Term Securities

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    1. In your own words, describe what is meant by an open market operation. Explain in detail how the FED can use open market operations to help stimulate credit, production, and employment.

    2. "Operation Twist" involves the FED selling its short term securities, while purchasing long term securities. This is an effort to lower the long-term yield curve. With the use of two separate bond market diagrams, one for the short term and one for the long term, show the effect of "operation twist" on short and long term interest rates. How is this maneuver supposed to influence business and the economy?

    3. Apple, Inc. has been one of the best performers in recent history. Below is a graph of the stock price over time (Please see the attached PDF document).
    a. Use consumer theory, that is, consumer demand analysis, to postulate and discuss two possible explanations of
    Apple's stock price movement.

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    Solution Preview

    Step 1
    According to consumer theory one reason why the price of Apple Inc share has increased from $10 in 2004 to a peak of $667 in 2012 is that there is a high demand for Apple, Inc. share. The demand has increased because of sustained improvement in financial performance, lack of substitute shares, and a portfolio of cutting edge products. The market demand for Apple Inc shares has gone up because there are many customers who are willing to pay a premium for Apple Inc shares. There is high desire to buy these shares and the consumer preference for these shares has pushed up the prices of Apple Inc share.

    The second possible explanation is that with economic downturn there are fewer companies whose stocks are comparable with those of Apple Inc. The alternative avenues of investment have declined leading to higher consumer demand for Apple, Inc. shares. This has ...

    Solution Summary

    This solution explains four different problems related to consumer behavior and market forces. The sources used are also included in the solution.