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Business & Marketing
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Stock Markets and the Economy (Essay Sample)


Assess the impact on the U.S. stock market when the Federal Reserve increases the money supply, and whether or not you believe the impact is predictable. Describe an industry that you believe is in stage 2 of the industry life cycle. Provide evidence that supports your analysis.


Stock Markets and the Economy / Industry Analysis
Stock Markets and the Economy / Industry Analysis
Question 1
Money supply is one mechanism of monetary policy that the Federal Reserve uses to stabilize the economy by influencing real activities such as consumption, investments, savings, and so forth. A positive money supply shock is likely to increase the rate at which these real activities take place as people’s demand for money would rise proportionately (Brush, 2010). Increase in money demand triggers various economic activities in the market. With higher economic activity, the cash flows in the economy are likely to increase that consequently result in high stock prices.
As argued by Bernanke and Kuttner (2005), stock price is a function of its monetary value implying that when monetary value is high, the stock price will be high. The impact of increase in money supply is predictable such that the more the anticipated changes in the money supply, the greater the effect of changes translated in real activity on the stock prices. Although the anticipated and unanticipated changes in the money supply have a positive relationship with stock prices, the former matters more than the latter in assessing the impact.
Question 2
The second stage of industry life cycle is the growth phase that takes place immediately the first phase ends. In the today’s world, computer industry is an example of an industry in the growth phase. It is characterized by frequent upgrades in hardware, services, add-on products as well as enhancement of the services. Moreover, the firms in the computer industry are trying to differentiate their products and marketing activities from other ...
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