Newbit at business and economics. Have some questions

Discussion in 'Growing and Managing a Business' started by ZLV, Feb 5, 2012.

  1. ZLV

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    Feb 5, 2012
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    1. I have read that when FED raise interests economy goes down. Can anyone explain me how it happens?
    2. Can someone have profits when inflation is happening? How? I have read that it's possible
    3. How it happens that governments of states have depts of billions of $ and still keep normally functioning and borrowing even more?
  2. ArcSine

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    Jun 2, 2010
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    1. The Fed's rate-setting action generally influences shorter-term rates. A lot of business financing (working capital loans, e.g.) lives within the short- and mid-term part of the spectrum. As the cost of banks' money increases (Fed raises rates), they need to demand higher rates in turn on their own loan originations in order to maintain their profit spread. This causes fewer commercial projects to qualify for bank financing, and hence has a damping effect on economic activity and growth.
    2. Accounting profits only require that book revenues > book expenses. As long as both revenues and expenses are moving roughly with inflation, the accounting bottom line (profits) remains positive, assuming it was positive to begin with. Economically, you'll have positive real (i.e., inflation-adjusted) profit as long as your net cash flow growth rate exceeds the inflation rate.
    3. A gov't unit can borrow (issue bonds, e.g.) as long as the lender / bond purchases continue to believe in the unit's ability to satisfy the debt through taxes, population growth, etc.

    Beneath those very short answers there exists a boatload of complex details, but that's why the studies you're embarking on will be fun and interesting. Meantime, this stuff above is just the tip o' the iceberg, but maybe it'll point you in the right direction. Best of luck with your studies!
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