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Economic Choice & Decision Making

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Consider your last vehicle purchase and the decision making process you engaged in while deciding what vehicle to purchase or if a new vehicle was the right decision. While analyzing your decision, keep in mind that everything from the interest rates to the price of gasoline is driven by the economy in one way or another.

Analyse your decision-making process in which you include the following:
Discuss the role of the interest rate and the cost of financing on your purchase decision. Interest rates are derived from the supply and demand for money and the actions of the Federal Reserve System. What was the rate of interest you paid on your vehicle loan? Were interest rates rising or falling at the time of your decision?
Examine the influence of gasoline prices on the choice of vehicle you selected. Gasoline prices rise and fall dramatically based on economic supply of and demand for crude oil. When gasoline prices are low, Americans buy larger, heavier autos, SUV's and pick-up trucks. When gas prices are high, Americans purchase more compact and fuel efficient vehicles. When you purchased your last vehicle, were crude oil and gasoline prices rising or falling?

Discuss the following in regard to your household at the time of your purchase:
Were you employed?
Was the economy growing or contracting (recession)?
If you were employed, did you take into consideration the risk that you might lose your job if a recession occurred during the period of your loan pay-back?

A basic assumption of consumers making purchases of large items requiring financing is that their household cash flow will be adequate to cover the monthly loan payments. For most Americans, this also means assuming continuation of their present wages. But many jobs are sensitive to rises and falls in the business cycle, as witnessed by the 10% unemployment rate of the past "Great Recession."

Evaluate the financial trade-offs made when making your purchase. This includes lower maintenance costs for a newer vehicle versus a car payment and higher insurance among other factors.

Discuss the influence of any of these Federal or state level programs on your decision to purchase a vehicle; or if these did not factor into your decision, explain why or why not:
Buying fuel efficient vehicles such as Flex fuel, hybrids and electrics
Converting existing vehicles to use alternative fuels (Flex fuel)
Removing old, fuel inefficient, and high polluting vehicles from the highways

Explain the influence of environmental factors such as emissions and health concerns on your decision.

Discuss the ways in which your purchase illustrates one piece of the circular flow model of economic activity. What are the other parts?

Develop conclusions about the economy's influence on personal and business decision making such as purchases, investments, and so forth.

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My last vehicle purchase took place in September 2013. The car was Chevrolet Spark. The automatic transmission is a Jatco M4M-CV77. There is Continuous Variable Transmission and the drive ratio is 3.75. The car has high fuel economy, and low noise.
I wanted to purchase a new vehicle because I did not want frequent breakdowns nor did I want to spend more on maintenance. In my opinion the purchase of the new vehicle was the right decision.
The auto loan rate paid by me was 2.59%. When I purchased Spark the price of gasoline was $3.65 per gallon. When I went through the details of the car, the mileage was 31 miles per gallon in the city, 39 miles per gallon on the highway and 34 miles per gallon combined (1). At the time I made the purchase, the price of the car charged to me was $12,799. From the point of view of the economy, in September, there was feeling that the great recession was over and within a few months the Federal Reserve will commence raising the interest rates. Further, the gasoline prices had more than doubled what they were in 2009. There was apprehension that gasoline prices would increase further. There were three cost related factors that were considered by me. First, the cost of the new car, second the cost of fuel, and third the interest cost. My objective was to keep each of these costs to the minimum. In my judgment at that time Chevrolet Spark fulfilled these requirements.

The role of the interest rate was important. At that time the interest rate charged to me was 2.59%. At that time the unemployment rate had declined from the peak rate of 10% in 2009. There was a general feeling that the economy was in the recovery phase and that the Federal Reserve will begin raising interest rates. From that perspective, I felt that it was the right time to buy a new car. In future, I would have to pay a higher rate of interest for the new car. At that time in my opinion, the interest rates were falling. Today I know that the Federal Reserve did not raise interest rates in 2013 but raised them only in December 2015. This is hindsight. In September 2013 there were reports that the Federal Interest rates were likely to increase soon. In addition, ...

Solution Summary

The answer to this problem explains economic choice and decision making. The references related to the answer are also included.