Question

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. 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? 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

The Federal Reserve formulates some policies to control the economy of the country which we call monetary policies.

From time to time, we are influenced by monetary policies framed by the Federal Reserve. If the level of inflation has increased in the country, then the Federal Reserve tries to reduce the level of inflation by following a narrow monetary policy and if there is a slowdown in the country, then the Federal Reserve increases the flow of currency by following the circulated monetary policy. This is the reason that when the prevailing monetary policy is used, we get a loan from the bank at a cheaper rate, because the rate of repo rate on banks is reduced by the Federal Reserve.So when I have to take a loan for my house, I will take a loan after the Federal Reserve reduces the repo rate on banks, so that I will get it at a cheaper rate than before. So that I will not have to pay much interest and I will save money.

Interest rates, people have to pay on the loan taken to buy an item and it can go as a big part of people's income and hence it affects people.

Buying or building a house is a big deal for middle-class families and they take a large amount of earned capital as well as a loan which to be paid with interest rate prevents them from making any other purchases for many years because a large amount is spent in this payment.

Similarly, if the interest rate is more than the reach of the people, then they will stop taking loans, which will affect the economy and if it continues for a long time, the economy will lose momentum which can lead to a slowdown in any one sector of the economy or the entire economy.