Suppose the Fed's Beige Book reported that "in South Florida, bookings for the summer tourist season were off to a slower start than last year" and that "tourist counts and revenues were down in Hawaii and Las Vegas and at destinations such as golf schools and luxury resorts in the inter-mountain states and along the West Coast."
If this information reflects nationwide consumer choices regarding discretionary income, what would you predict about the future course of Fed policy regarding interest rates?
Would your prediction change if you believed that slower travel activity was the result of higher gasoline or other transportation costs?
This is a matter of whether people are saving more and consuming less.
An important aspect of saving is that the funds people put aside usually earn interest or some other form of return. Suppose that the interest rate that people expect to earn on their savings is high enough. So, the question is how will this high interest rate affect the amount of savings that people do (and hence the amount that they consume).
A higher interest rate affects people's ...
The solution provides a great response to the question of predicting the future course of Fed Policy. The response is detailed and very well articulated. The solution provides two viewpoints to the increase in savings rate which are both correct theoretical explanations. It is an excellent response for students who want to understand the concepts and then use the same concepts to solve similar problems in the future. Overall, a very good response.