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Question 1

Economics

Question 1. Answer the following: [24marks; 6 marks each] a. Discuss the reason(s) behind dividing the project into three phases ( why not all of the in one phase) b. Discuss the importance of human resources part in feasibility study". c. Explain the difference between simple interest rate and compound interest rate. d. Discuss the planning horizon and why it's important for project evaluation.

Government debt is made cheaper when the Reserve Bank purchases bonds. Explain this statement. What is the impact of Quantitative Easing on the yield of government bonds? How has center bank been able to control the rate of interest on these bonds

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Answer:

1: The project is dividing into parts because
the project manager and project team works on the project in according to their given task and they both have the same shared goal or aim. They conduct meetings and set the objectives of project which is impossible to set in one phase(all phases) .
Moreover every project has a beginning,on the basis the project is started, a middle period through which the activities moving the project towards its goal or finial completion. The last phase is ending the outcome is either successful or unsuccessful.

2: Human resources part in feasibility study plays a vital role because It includes questions regarding, expenditure, time and other things which are important for completing the project, moreover it helps to decide type and amount of resources which are needed as well as dependent factors.

in addition to this It takes care too whether the project is benificial or not with the current business activity.

3: Simple interest rate is calculated on the basis of basic or we can say the original amount of a loan. In contrast the compound interest is calculated on the original or basic amount and also the accumulated interest of previous periods is calculated . It is also called interest on interest.

4:  

n simple words the planning harizon means " length of time which is set for the future and is considered for a particular plan of future.
Moreover we can say the planning horizon is the amount of time for an organisation or any company which will looks into the future for making a strategic plan. The commercial companies or organisations use a 5 year planning horizon, where as a general planning horizon makes or prepares 1 year plan.
It plays an important role to make better plans regarding the projects of companies. Every step or phase of project is preparing with the help of planning horizon.

In the 2008–2009 downturn, when official interest rates approached zero, central bankers extended their actions to include quantitative easing to try to lower interest rates further out on the yield curve to stimulate the economy.

Following the collapse of the credit bubble in 2008, a number of governments along with their central banks cut rates to (near) zero, including those in the United States and the United Kingdom. However, there was concern that the underlying economies might not respond to this drastic monetary medicine, mainly because the related banking crisis had caused banks to reduce their lending drastically. In order to kick start the process, both the Federal Reserve and the Bank of England effectively printed money and pumped it in to their respective economies. This “unconventional” approach to monetary policy, known as quantitative easing (QE), is operationally similar to open market purchase operations but conducted on a much larger scale. The additional reserves created by central banks in a policy of quantitative easing can be used to buy any assets. The Bank of England chose to buy gilts (bonds issued by the UK government), where the focus was on gilts with three to five years maturity. The idea was that this additional reserve would kick- start lending, causing broad money growth to expand, which would eventually lead to an increase in real economic activity. But there is no guarantee that banks will respond in this way. In a difficult economic climate, it may be better to hold excess reserves rather than to lend to households and businesses that may default. In the United States, the formal plan for QE mainly involved the purchase of mortgage bonds issued or guaranteed by Freddie Mac and Fannie Mae. Part of the intention was to push down mortgage rates to support the US housing market, as well as to increase the growth rate of broad money. Before implementing this formal program, the Federal Reserve intervened in several other markets that were failing for lack of liquidity, including interbank markets and the commercial paper market.

This first round of QE by the Federal Reserve was then followed by a further round of QE, known as QE2. In November 2010, the Federal Reserve judged that the US economy had not responded sufficiently to the first round of QE (QE1). The Fed announced that it would create $600 billion and use this money to purchase long- dated US Treasuries in equal tranches over the following eight months. The purpose of QE2 was to ensure that long bond yields remained low in order to encourage businesses and households to borrow for investment and consumption purposes, respectively.

As long as they have the appropriate authority from the government, central banks can purchase any assets in a quantitative easing program. But the risks involved in purchasing assets with credit risk should be clear.