Question

Unit 7

Discussion Board

The Federal Reserve is responsible for managing the country’s money supply. Monetary policy affects the whole economy through interest rates. When the Fed increases the money supply, interest rates drop. When the Fed decreases the money supply, interest rates increase. This week you will discuss how you are affected by the Federal Reserve’s monetary policies. In your discussion, please consider the following questions or statements.

1. Think about a recent purchase you made that required a loan, like a house, or a new car. Explain how you arrived at the decision to purchase. Then explain how the interest rate on the loan affected your purchase. For instance, were you able to purchase a higher priced item because the interest rate was low?
2. Thinking deeper about your answers; how do interest rates affect millions of other buyers and their decisions, then how that affects the whole economy? Explain.

Answer 1

Looking at the current interest rates offered by the banks and the drop from the previous interest rate levels, I decided to purchase a new car as the interest payments would also be low and I wanted to take advantage of it, considering that I had a stable job and would be able to afford the interest payments.

Because of the low interest rates, I decided to go for a premium version of the car which had all the latest amenities as I anyways was going to pay less interest on the borrowed money over the long term duration. And money was cheap, so it would be better to invest in the latest technology which would prevail for a longer horizon.

This would be the same mentality worldwide, thus automobile sales would increase and more new innovative products will come in the market as sales have increased, this would lead to higher GDP growth as individuals are spending money on high priced items, which ultimately drives the economy. Those automakers would ultimately increase their consumption level by buying new houses as their sales are increasing. Thus the money gets circulated around the economy, driving the output further with higher consumption.