1. What would happen if the Fed targeted lower interest rates? Higher interest r

Question

1. What would happen if the Fed targeted lower interest rates? Higher interest rates?

2. In this news analysis, you explored how an energy price shock affects aggregate supply. The article mentions that high energy prices might affect consumer spending as well. If higher gasoline prices lead to expectations of even higher prices in the future, consumers may cut back on spending today in order to absorb price hikes in the future. How would this affect aggregate demand? How would this change the predictions of the aggregate demand and aggregate supply model?

Explanation / Answer

1.If the Fed targeted lower interest rates, it would spur the economy by making corporate and consumer borrowing easier. Higher interest rates are intended to slow down the economy by making borrowing harder.

If the fed raises interest rates, banks raise their prime rate, which in turn affects mortgage rates, car loans, business loans, and other consumer loans.

If interest rates increased from 6% to 14% what do you think would happen in the area of home mortgages? Naturally, less people would be buying or building homes, and the sale of building supplies would decrease.

Make sense? If interest rates decreased from 14% to 6% what do you think would happen? People would be storming the banks in a rush to borrow "cheap" money to build new homes, buy cars, and invest in their business.

2.A change in demand is caused by a change in the five demand determinants, namely: buyers' income, buyers' preferences, other prices, buyers' expectations, and number of buyers.

Should buyers expectations decrease, as in this example, the AD curve will shift to the left, resulting in a new equilibrium price and quantity at its new intersection with the AS curve.

Source:

http://www.amosweb.com/cgi-bin/awb_nav.pls=wpd&c=dsp&k=change+in+quantity+demanded

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