Monetary policy is administered exclusively by the Federal Reserve and as the nation’s central bank, the Federal Reserve System determines the total amount of money circulating around the economy.
In principle, the Fed can use three different “tools”–open market operations, the discount rate, and reserve requirements–to manipulate the money supply. A more commonly used device (not really called a tool) is the federal funds rate; this is the interest rate that banks charge each other when loaning bank reserves through the federal funds market. The Fed recommends what this rate should be.
In practice, however, the most commonly used tool is open market operations. To counter a recession, the Fed would undertake expansionary policy, also termed easy money. To lower inflation and the bad effect of high prices, contractionary policy is the order of the day, and goes by the name tight money.
Stacks of dollar bills [Image]. (n.d.). Retrieved from http://www.scpr.org/news/2015/02/20/49949/l-a-s-fe…
Your assignment for this week is to give us an example (hopefully a personal one) where you have seen a rise or fall in interest rates which then influenced a decision you observed. This can be a business decision or a personal decision, a decision you made personally or a person you know.
In your example, be sure to:
- analyze the options the borrower or investor had when the choice was made.
- note whether the length of the term of the loan or investment influenced the interest rate.
- note whether the risk of loss for the loan or investment influenced the interest rate.
- If your choice is a loan, whether the age/type of collateral influenced the interest rate.
Let’s see how the changes in rates can affect our economy in the multitude of ways you and your classmates have observed.
Discussion Post Requirements and Due Dates
In this class you must present well thought-through and substantive first entry. It is also expected of you to respond to other students’ entries at least three times (politely). Be concise but complete. You will receive a grade for this so think your comments through carefully. Economic concepts always score higher too.
Responses are due by Sunday at 11:59 pm CT. Respond to a minimum of three of your classmates’ postings.
Make sure not to repeat what one of your classmates has said, otherwise you will be asked to re-post. Lastly, additional references (besides out textbook) should listed using either the MLA or APA formats; you need not identify our text as a source.