Question

Describe how interest rates affect household decisions to save more or less of their income.  Given that the Federal Reserve sets interest rates, and given the current average rate of interest earned on savings, what is the incentive in our economy today?  How does this affect the housing market? Please use at least 400 words.

Answer 1

Interest rates decide how much interest payments will be paid by savers on their deposits. Rising interest rates would make investing more appealing and savings should be promoted. A fall in interest rates decreases investment opportunities and appears to deter investments. It's more difficult in the real world, however. Because many factors affect savings, the link between interest rates and savings is not clear.

When interest rates drop, the saving bonus decreases. Holding money and/or investing is becoming increasingly more desirable. This is the replacement effect–with lower interest rates, consumers are replacing spending savings.
Nevertheless, savers see a drop in profits when they receive lower dividend payments as interest rates fall. A pensioner who relies on savings interest payments may feel he needs to save more to keep his target savings income. The replacement impact typically dominates. Lower interest rates make it less attractive to save. But, for some, the effect on income may dominate, and people may respond by saving more to lower interest rates to maintain their living standards.

Lower interest rates promote additional investment spending, which in periods of slow economic growth gives the economy a boost. The Federal Reserve Board, also known as the Fed, is responsible for setting interest rates by monetary policy for the United States. The Fed is changing interest rates to impact goods and services demand. Fluctuations in interest rates can have a significant impact on the stock market, inflation, and the economy as a whole. Reducing interest rates is the most powerful tool for the Fed to increase investment spending in the U.S. and try to steer the country out of recessions.

In the end, the Fed is using monetary policy to stabilize the economy. The Fed reduces interest rates in times of economic recession to promote additional investment spending. The Fed takes steps to increase interest rates slightly to keep inflation at bay when the economy is growing and in good condition. The Fed sets the long-term interest rates of the federal funds. The federal funds rate is the interest banking institutions charging each other for overnight reserve loans or balances needed to meet the Fed's minimum reserve requirements. The Fed indirectly adjusts long-term interest rates by setting the federal funds rate, which increases investment

The Federal Reserve plays an important role in expectations of inflation. This is because the understanding of the bond market of how well the Federal Reserve controls inflation by implementing short-term interest rates influences longer-term interest rates, such as U.S. yield. Treasury 10-year bond. In other words, the Federal Reserve sets existing short-term interest rates that are perceived by the market to assess long-term interest rates such as U.S. yield. Treasury 10-year bond.