The interest rate that can be earned is the opportunity cost of holding money. How does your firm attempt to minimize this opportunity cost while still having enough money to pay bills, wages etc? Since holding a substantial amount of money is costly, given the opportunity cost, one’s demand for money should be guided by interest rate. When the interest rate rises, the demand for money falls (Suranovic, 2008) A firm should be guided by the interest rate when deciding to hold a substantial amount of money.
One company can minimize the cost of holding money by monitoring the interest rate and see if the interest is low enough to be forgone. However, in cases where interest rates are extremely high, a firm should keep only a minimal amount of money: enough to shoulder the firm’s expenditures. DQ#2 Wk4: If your company appointed you to be the “Fed Watcher”, what would you pay attention to in regard to current monetary policy? Why? If my company will be appointed as “Fed Watcher,” the monetary policy that should be given utmost attention now is the interest rate.
Given the current financial crisis, many firms are in need of additional capital. The interest rate plays a significant role in a firm’s decision to borrow more capital. If the Federal Reserve’s policy with regard to lending money is attractive enough, many firms would borrow at a low interest rate, hence stimulating the economy. DQ#3 Wk4: Would you consider fiscal or monetary policy to have a greater impact on the industry you work in? Why?
Saying that fiscal policies greatly affect each firm is not an exaggeration. A firm’s business decision is always guided by fiscal policies. With the financial crisis the world economy is facing right now, many firms’ fate is actually dependent on current monetary policies being implemented by fiscal authorities. Reference Suranovic, I. (2008). International Finance Theory. Retrieved 6 February 2008, from http://internationalecon. com/Finance/financehome. php.