Purchase Solution

How lower interest rates affect the economy

Not what you're looking for?

Ask Custom Question

Suppose that the Federal Reserve acts to lower interest rates. How this will affect the U.S. economy?

After the economic slowdown that started around the third quarter of 2000, the Fed lowered interest rates eleven times in the following year, 2001. What concerns would have about the effort by the Fed to smooth out this economic recession?

In contrarily, suppose that the Fed unexpectedly increases the rate of money growth. What are the effect on short-term and long-term interest rates, and why those effects are different.

Purchase this Solution
Solution Summary

How the U.S economy is will be affect by lower interest rates of the Federal Reserve is discussed.

Solution Preview

By lowering the discount rate, the Fed alters the supply and thus the demand for money. This is based on the premise that interest rates are a type of price. The Fed can lower the discount rate and lower the costs for banks holding low excess reserves which will lower the excess reserve rate. If the Fed lowers the discount rate, or sets a lower federal funds target, this can be accomplished if the Fed injects funds into the system which will drive down the price of those funds - interest rates. If interest rates are low people will not lose much money in foregone interest by holding a portion of their wealth as cash. If you happen to have $1,000 and hold it as cash, then you will be giving up the opportunity to earn $100 when the interest rate is 10%. If the interest rate falls to 5%, then by holding cash you will be giving up the ...

Purchase this Solution
Free BrainMass Quizzes
Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

View More Free Quizzes
Related BrainMass Solutions

  • 8 General Economics Questions

    How does a federal budget deficit affect the economy? How does it affect the level of investment and interest rates? How does it affect the individual consumer? Give at least three examples in your response. 2.

  • WACC, Capital Budgeting, and Stock Pricing

    Explain how a change in interest rates in the economy would be expected to affect each component of the weighted average cost of capital? 2.)

  • Financing of debt

    If on the other hand the economy is showing signs of weakness, the Fed will lower rates in order to stimulate economic growth. In that case, it would be better to wait. 4. When interest rates are high, the cost of debt is greater.

  • How a Recession Affects Certain Economic Variables

    The value of money would be uncertain without further data, such as the exact effects of the interest rates and price levels on the overall economy.

  • Fiscal Policy and Monetary Policy

    On one hand the monetary policy attempts to stabilize the economy through controlling interest rates an supply of money. On the other side the fiscal policy attempts to affect the economy through government spending and taxation.

  • economic indicators

    Describe how the Federal Reserve?s policy-makers influence interest rates. Explain the difference between expansionary and contractionary policies. 3.

  • Conducting an Interest Rate Report

    For some of the lower priced products of Big Drive Auto, movements in interest rates can indirectly affect demand. Significant movements in interest rates can affect prices of commodities in the short term.

  • Airline Industry

    On the other hand if there is fall in the growth of the economy, there will be lower demand for airlines industry, and lower employment rates. If the interest rates go up, the leasing charges of airlines increase.

  • Inflation, Unemployment, Interest/Exchange Rates

    Raising interest rates has the opposite effect and slows the economy down. Exchange rates also affect the AD curve.

View More Related Solutions