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[answered] BANKING WITH TRUST You walk into the offices of Bank of Tru


One of the assertions is that changes in Federal Reserve policy can affect inflation. Do the data support a connection between the rate of increase in the money supply and inflation? Using the data on the growth rate of M2 and inflation in your spreadsheet, run ?aregressionof the rate of inflation on the rate of growth of the money supply. What does the coefficient on the money supply variable tell you? What is the meaning of the p-value?Is the regression coefficient significant? Is faster money growth always associated with higher inflation??Please make a regression analysis and a scatter plot using the data in your spreadsheet.


BANKING WITH TRUST

 

You walk into the offices of Bank of Trust early in the morning on February 2nd, 2006. You are employed

 

by the bank to market proprietary financial products to moderate to high net worth customers. Going into

 

the break room to grab a cup of coffee, you flip on the TV to CNBC to catch the morning financial news.

 

The commentator says ?? and the latest release shows that consumer confidence has fallen for the

 

second straight month. Given this, and the previous statistics on business inventories, it is not surprising

 

that investors are nervous. So, now, all eyes turn to the Fed?. You switch the TV off. It looks like the

 

economy is going to be the topic of discussion for the next week. More importantly, the people you work

 

with will expect you to know what is happening (and maybe explain it to them). It is going to be a busy

 

day.

 

Bank of Trust 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 to

 

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

 

courses.

 

Bank of Trust has a large staff dedicated to customer relations. Jobs range from handling accounts to

 

marketing consumers? products to providing financial advice. Your job is to work with this staff to

 

determine what the best products are and how best to market them. You interact daily with people from

 

all over the bank, including some of the bank?s major customers (since they are a good source of

 

information on how the company is doing).

 

A large part of the bank?s customer base is retired individuals who have had long-term relationships with

 

the bank. These individuals have a range of financial expertise, some being dedicated followers of the

 

financial news, while others have never heard of the Federal Reserve.

 

The bank?s customers get their income from a variety of sources. Most have traditional bank accounts.

 

Some, particularly the middle age customers, have substantial holdings of stock. Retired investors also

 

typically have some sort of pension or retirement plan. The bank?s customers can be very concerned

 

about changes in the economy. Those holding stock are worried about corporate profitability; the more

 

profitable the company, the higher the value of the stock. Some of those with pensions have other

 

concerns. Often, the value of their pensions does not keep up with inflation. These investors tend to

 

watch for signs of future inflation that could mean they would have a lower real income in the years

 

ahead.

 

The growth of GDP seems to be slowing, leading many investors to be concerned about the future

 

prospects for the economy. One indicator of the weakness of the economy is the decline in consumer

 

confidence, a measure of how optimistic consumers are about the strength of the economy in the near

 

future. If this decline continues, it could lead to a decrease in consumer spending. Also, firms have spent

 

the last two years dramatically expanding their capacity by buying new machinery and building new

 

factories. Because of this, it is expected that companies are likely to reign in spending on investment

 

over the next year.

 

The Economic Research Group of Bank of Trust has provided historical data on GDP along with

 

forecasted values for the upcoming year (see the spreadsheet on the course website). The forecasts are

 

based on the information given above, but the forecasts also assume that the Federal Reserve will not

 

take action. Copyright 2009, Dr. James Dow and Dr. Gordon D. Johnson The Federal Open Market Committee (FOMC) of the Federal Reserve will be meeting in two weeks to

 

make a decision on monetary policy. The leading issue at that meeting will be the weakness in the

 

economy. Many of the members of the FOMC believe that the Federal Reserve should take immediate

 

action to counter the forecasted decline in the economy. Required:

 

Sitting down in your office, coffee in hand, you jot down some questions you think might come up during

 

the day?s discussions. Prepare a report, using the report guidelines from the course website.

 

To prepare for this case, you may want to review macroeconomics LDC concepts 1, 5, 6, 7, 8,

 

and 9; and statistics concepts 4, 7 and 8.

 


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