Question

What are the pros and cons of the “zero interest rate policy” (i.e., very low interest rates) of the Fed, from the perspective of the car industry?

Answer 1

Answer: Following a very low interest rates policy by federal bank for a long time do have its various pros and cons in its place.

As with respect to car industry ,when Fed will carry on zero interest rate policy or very low interest rate policy then Fed is following Expansionary monetary policy so Fed fund rate and interest rates will be low and banks will lend at lower interest rates.Hence Automobile industry which is a capital intensive industry so businesses will borrow more and invest in business which will lead to higher employment so by this purchasing power with public will increase and will increase demand for goods and services and inflation will increase from its previous level.

Here cons are also there as if for a long time if Expansionary monetary policy will be followed the it will increase only inflation but will not decreases unemployment as can be seen by Long run Phillips curve there is no trade off between inflation and unemployment.Hence after a limit such monetary policy can not be sustainable for economy in general and car industry in particular.

Hope it helps!