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Money and Interest Rates (Essay Sample)

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 May 17, 2010. Economic Focus: "What goes around", The Economist, Retrieved May 17, 2010. 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. How can the Fed can influence interest rates in the current economy? Be specific about the primary tools of monetary control. What would be your suggestion to stimulate or "fix" the economy? 3. Do you think prospects for changes in Fed policy would affect your decision to make a purchase that requires financing? Explain. There are plenty of current news articles on this issue. Be sure to do some research on your own. Case Assignment Expectations: Use concepts from the modular background readings as well as any good quality resources you can find from the cyberlibrary or other internet search engines. Pleas be sure to cite all sources within the text and provide a reference list at the end of the paper. Length: 4-5 pages double spaced and typed. The following items will be assessed in particular: Your ability to understand the relationship between the supply of money and the Federal Reserve. Some in-text references to the modular background material (APA formatting not required). The essay should address each element of the assignment. Remember to support your answers with solid references including the case readings. source..
Money and Interest Rates
Money and Interest Rates
Economic indicators which should be examined when one needs to take a loan to aid in making a purchase
The various economic indicators which should be examined before taking a loan include prevailing interest rates and inflation rates. For instance, the interests charged on loans determine the cost which one would incur by taking a loan. Low interest rates mean that a loan would be cheaper because one would be required to pay less after acquiring a loan. Contrary, high rates of interest on loans mean that the loan would be very expensive as one would be required to pay more. An individual who aspires to take a loan to buy an item which would cost a lot of money like expensive business equipment should examine the interest rates prevailing in the market. It would be better for them to take loans in times of low interest rates. This would enable them to be charged less on the loans (Woodruff, 2010). They should also examine stability of the interest rates to avoid inconveniences which may come up due to instability of interest rates.
One should examine rates of inflation before taking a loan to avoid cases where by money would lose value making the loan expensive in terms of output which would be received from the business. Lose of money value would mean that the individual would pay more for the loan and this would be very expensive. It is therefore better for individuals to take loans in times when inflation is not likely to affect money stability. This may be determined by the state of inflation which has prevailed in the economy at the past time periods. In economies whereby inflation rates have been changing affecting money stability, it is likely that inflation would affect money stability in future, where as where inflation has not been high affecting money stability, it is likely that money would remain stable even in future. This is because it is determined by effectiveness of government control of financial state of the economy through the use of the tools used in monetary control policy.
Influence on interest rates by Fed
Fed refers to governors’ board which controls banks federal reserves, sets up monetary policy to determine credits and interest rates, and checks the country’s economic health. Members of Fed are assigned by president after confirmation by the senate. They ensure that interest rates and supply of money to the economy are effectively regulated. There are various ways in which Fed influences interest rate.
For instance, Fed influences reduction or increase in charged interest rates on loans supplied to the public by reducing or increasing rates of interests of loans supplied to the commercial banks. When they intend to make loans expensive so as to reduce supply to the economy, they lend to commercial banks at high rates so that the commerc...
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