Week 3 Eco372 Individual Assignment
Business and Management
Submitted By daniellabaca
Individual News Article
October 21, 2013
Dr. Darryl Baker
Individual News Article
A factor that consumers must consider today is the impact that interest rates have on the United States economy. Economists believed that the housing market would begin to heal, auto sales would hit a record high, and the government would begin running a surplus. However, the only correct prediction was the rise in auto sales. Auto sales rose tremendously, and was a good sign of the economy slowly recovering. Even though the government has full control of the economy their actions greatly affect the economy. In this paper I will analyze the effect that interest rates have on the economy and how aggregated supply and demand is affected.
The U.S. economy remains weak and the government has considered tapering. Tapering would mean that the government would have to reduce its asset purchase program. This process would have to be slow and gradual so that the markets will not be affected. Economists believe that tapering would result in an increase in interest rates and could have bad effects on the economy. The first part of the economy to be affected would be mortgage rates. The housing market is critical to a thriving economy and higher interest rates would slow it down drastically. For this reason tapering would be risky to the economy. Higher interest rates will hurt everyone except the investors who rely on interest income.
Higher interest rates leave less disposable income for consumers to spend and results in a loss of jobs. A loss of jobs affects the economy by affecting the aggregated supply and demand. When American jobs are lost exports increase and the U.S. economy is affected negatively. Thoma (2012), “Federal Reserve Chairman Ben Barnake believes that our unemployment problem is due mainly to the lack of economic demand. This is an important debate because if the fall in unemployment is mostly structural, there's little that monetary and fiscal policy can do to help to speed the recovery. But if lack of demand is the main culprit, then replacing the lost demand through aggressive policy can help us recover faster” (para. 1).
Demand for a supply is composed of three things: desire, ability to pay, and willingness to pay. If the demand for a product goes up it shows that consumers have the ability and the willingness to pay. However, companies must keep in mind that the higher the price, the lower the demand and the lower the price, the higher the demand. Prices are key ingredients in our economy because they make things happen. If consumers want to own items badly enough they will pay more for them. When companies want to sell their products bad enough, they will lower their prices. Supply and demand act as signals to buyers and sellers and is an indicator that encourages increased or decreased production. Finally, prices help to determine who will receive the economy’s output of goods and services. If a consumer’s income is up and interest rates are down there is more disposable income to spend. This creates the demand for the supply and determines pricing.
Supply and demand are the primary forces behind the interest rate levels. Interest rate are a major factor of the income a consumer can earn by lending money, bond pricing, and the amount one will have to pay to borrow money. When the government buys more securities, banks are equipped with more money than they can use for lending, and the interest rates decrease. When the government sells securities, there is a decrease in the amount of money the banks have at their disposal for lending and forcing a rise in interest rates. Interest rate levels are also a factor of the supply and demand of credit. An increase in the demand for credit will raise interest rates, and a decrease in the demand for credit will decrease interest rates. Subsequently, an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them. The supply of credit increases by the amount available to borrowers. It is important for a consumer to understand how prevailing interest rates change by the forces of supply and demand.
The greatest fear among executives is weak consumer demand for products and services. As consumers get nervous the calls for higher interest rates are rising. The evidence suggests that demand, not supply is holding back the economy. Bernake’s view is that present policies must stay in place to support the recovery is correct. The conclusion is that our economy remains weak, stocks are highly sensitive, and investors must remain cautious. Despite that many U.S. stock markets are reaching record highs investors need to have a plan in place to protect against a sharp decline.
The biggest advantage of a consumer is to understand the impact that interest rates have on the U.S. economy. Contrary to economists beliefs the economy is slowly recovering. Even though the government has full control, their actions greatly impact the economy. As analyzed in this paper interest rates do have an effect on how supply and demand is affected. Consumers must stay diligent on understanding how interest rates will affect them and their future. Although our economy is suffering, history does prove that the United States government has the ability and means to recover and improve its economy.
Thoma, M. (2012). Demand, not supply, is restraining the economy. Retrieved from http://www.cbsnews.com