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Money and Interest Rates

Money and Interest Rates
Money and interest rates are important for individuals and businesses making decisions to finance purchases. The following articles deal with assessing conditions to finance purchases and important aspects of policy.
Tom Woodruff has written an interesting and to-the-point article about effects of the Federal Reserve's monetary policy and changes in interest rates.
"A borrower's guide to forecasting interest rates" Retrieved on February 24, 2009.
Economic Focus: "What goes around", The Economist, Retrieved on February 24, 2009.
Read the above articles and write a 4-5 pages that address each of the following questions:
1. What major economic indicators would you examine if you were planning to make a large purchase and needed a loan? For example, think about buying a new car, some business equipment or a house?
2. Describe how the Federal Reserve?s (Fed for short) policy-makers can influence interest rates.
3. Do you think prospects for changes in Fed policy would affect your decision to make a purchase that requires financing? Explain.
4. How can the Fed can influence interest rates in the current economy? What would be your suggestion to stimulate or "fix" the economy?

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1. What major economic indicators would you examine if you were planning to make a large purchase and needed a loan? For example, think about buying a new car, some business equipment or a house?
The major economic indicators that I would examine if I were planning to make a large purchase and needed a loan include the following. I would look at the employment cost index, the quarterly worker productivity report and the gross domestic report. These indicators would give me an idea about the level of inflation in the market. Further, I would take a look at the consumer price index and the producer price index. These would let me know the current levels of inflation. I will examine the producer price index because it helps predict what will happen at the consumer level. In other words it gives you an idea of what interest rates to expect. The basic point is that if the inflation rate is high the interest rate that you need to pay for the car loan will also be high. Thus if the GDP growth rate is high it might indicate that the interest rates may be high. If you want to buy business equipment or a house it is important to look at the interest rates you may expect.
Similarly, if the consumer price index goes up there is also an increase in inflation and the rate of interest that you are likely to get will also increase. On the other hand if there is an increase in productivity the inflationary pressures will be lower and you stand a better change of getting loans at lower rates. Essentially, you need to examine indicators about the amount of money that was saved in the economy, mainly by households. In addition, you need to examine indicators that show the demand for funds by businesses and finally, you need to consider the indicators that show the government's net supply of funds and demand for funds.
2. Describe how the Federal Reserve?s (Fed for short) policy-makers can ...

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