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Money And Banking Essay

1040 words - 5 pages

Team members must hold at least three meetings to discuss the joint project, and you are required to record collective activities and individual activities as detailed as possible in your logbook. For individual activities, they must be endorsed by the other member. No free-riding for the group project is allowed. I reserve the right to read your logbook to identify each member’s contribution to the group work.
After reading this article “How does the stock market affect the economy?” it is obvious that the main topic of this article is about the stock market and how it affects companies and households. There are two main ideas of the article which I will summarize in this paragraph. Stock ...view middle of the document...

For this paragraph I will talk about if the evidence supports the conclusions. There are three conclusions that you can find from this article. First, the effects of the stock market on businesses are unclear because the relationship between firms and the stock market has changed a great deal. For this first conclusion, the evidence backs it up with the following statements. “ It is difficult to sort out an independent stock price effect from the cutbacks in staff and investment that arise from profit-maximizing behavior in an economic downturn. The relatively short period in which stock options have been a noticeable part of compensation and the lack of data, it is unclear to what extent workers will bargain for more cash in place of options and how this might affect payroll costs and inflation. It is difficult to determine just how much deterioration in financial conditions driven by changes in fundamentals works through a drop in stock prices.” (Page 9)Second, while criticisms of the stock wealth effect on consumer spending have some validity, a careful review of the evidence implies that stock wealth does affect consumption. Household stock wealth is still about 150 percent higher than it was in the mid-1990s, so consumption is still being boosted by stock wealth gains since 1994. According to the conventional model, the post-decline boost is 4.3 percent. This implies that the recent market decline has reduced the stock wealth boost to consumption by roughly 1.3 percent. Third, while the conventional stock wealth effect is likely overstated, the underlying impact on consumption and on firms has likely risen over time, due to factors such as the rise of mutual funds and venture capital that have democratized America’s capital markets. For this conclusion, the article backs it up by showing us dates and a build up from older to newer dates and shows us how the impact has risen over this time.
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