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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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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.

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See Also This Related BrainMass Solution

Freeport Bank and Hickman Savings and Loan

See the attached file.

Consider the following scenario:
Hickman Savings and Loan is concerned that market conditions might cause the short-term yield curve to be higher than the long-term yield curve. This negative yield curve means that long-term interest rates are lower than short-term rates. This will cause the bank to shift from its mortgage-based business strategy to one dominated by short-term loans, which is not an area that the bank has much market share. Explain how the yield curve is affected by the following:
? Liquidity preferences theory
? Market segmentation theory
? Expectation theory
? Other economic factors
Is it important for a bank to follow the yield curve? Why or why not?
Grading Criteria
Explain how the yield curve is affected by the liquidity preferences theory. 35%
Explain how the yield curve is affected by the market segmentation theory. 20%
Explain how the yield curve is affected by the expectation theory. 20%
Explain how the yield curve is affected by other economic factors. 20%
APA citation and references (if applicable) or the percentage will be assessed in the criteria above. 5%

Consider the following scenario:
Freeport Bank is committed to increasing its commercial mortgage market share but is concerned about interest rate risk. Write 250 words explaining to the bank's management team the various types of interest rate risk. Be sure to address the following components of interest rate risk:
? Market risk
? Reinvestment risk
? Inflation risk
How important is interest rate risk to Freeport Banks long-range strategic planning? How can the bank protect itself from these types of interest rate risk?
Suggestions for Reviewing Peer Posts
Compare and contrast the answers given by your peer to your own on the importance of long-range strategic planning and interest rate risk. What similarities or differences exist? What additional points can you make to support his or her responses?
Grading Criteria
Response to Discussion Questions 80%
Response to Peer Posts 15%
APA citation and references (if applicable) or the percentage will be assessed to response to peer posts 5%.

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