Question

According to a financial report, the unemployment rate is reported to be 8%. As a result, The Fed Reserve is thinking about introducing liquidity to the financial market. As an investor, please explain in great detail which would you choose: a 17 year maturity note or a 4 year maturity note? and why? Explain how it relates to the unemployment rate of 8% and the Fed Reserve introducing liquidity

Answer 1

Employment level is high I.e. at 92% it means more inflow of money into the economy. At the same time fed reserve has decided to introduce more liquidity to the financial market I.e. more inflow of money into the market. Thus, due to larger inflow of money into the economy the value of money will decline hence interest rate would tend to be low. Due to lower rate of interest it would be preferable to invest for a longer time period. In the current scenario as employment level is high therefore more inflow of money into the economy shifts the economies demand curve to the right and hence the inflation due to this overall GDP of the country will improve. Consequently industrial supply too will be increased to satisfy demand so more employment. With surplus income we can sustain in the long run hence longer investment period will be preferred over shorter one.