Read the article below (The Impact of the US Interest Rates on the Global Econom

Question

Read the article below (The Impact of the US Interest Rates on the Global Economy) and answer the questions that follow The Impact of the US Interest Rates on the Global Economy Yousef Mohammad: Democratic Arabic Center (Translated) Link: http:/democraticac.de/?p- 23329 The US interest rates do not only affect the US economy but the global economy as a whole. The whole world is waiting for the decision of the Federal Reserve (the US central bank) on the interest rate through its Federal Open Market Committee (FOMC). The FOMC conducts monetary policy by adjusting the level of short term interest rates in response to changes in the economic outlook. The FOMC wl review its monetary policy during its regular meeting scheduled on December 16th and is expected to take a decision to increase the interest rate for the first time in ten years. The last time the FOMC increased interest rate was in mid-2006, one a half years before the 2008 financial crisis. Right after the crisis, the FOMC has taken various measures in order to stimulate economic growth and recover from the recession that hit the US economy and the world economy as a whole One of the measures taken was the adoption of an expansionary monetary policy through quantitative easing where a large amount of government bonds was purchased by the Federal Reserve. This operation increased the amount of reserves in the US banking system which led to a gradual reduction in interest rate from 5.25% in 2006 to approximately 0% in December 2008, The US interest rates have been ranging between 0 and 0.25% since the end of 2008. The most important factors that affect the decision of the Federal Reserve to raise or reduce the interest rate are the unemployment and inflation rates. The Federal Reserve seeks to achieve low unemployment rate together with price stability. The low inflation rate followed by the financial crisis in 2008 was the main reason for keeping interest rates close to zero unchanged until novw

Explanation / Answer

Q 1. According to the content of the article, do you believe that the decision of the US central bank to increase interest rates is a driving force influencing the global economy?

A: This decision is absolutely a driving force for the global economy because the value of the dollar will be affected by the higher interest rates; this rise will start a domino effect that eventually will also affect the debt of other countries, the global capital flows, and the exports and import for the majority of the nations; these effects will affect the economy as a whole supporting the idea of a major impact of the US central bank decisions to the world economy.

Q 2. Explain the impact of the decision of the US central bank to increase the interest rates on the emerging markets and the world economic growth

A: The decision of an increase to the interest rates will affect the capital flows, pushing the dollars from real investments to bank deposits; this phenomenon will increase the demand for dollars in the world which eventually will decrease the price of other currencies; this depreciation of currencies will rise the national debt of this nations, especially the developing countries. The world economy will suffer the effect of higher interest rates in America through the capital flows from other countries to USA; these flows will destabilize these countries because they will have less capitals in their local economies, and with the reduction of possible investments will come a decrease in the world economy as a whole.

Q 3. Analyse the impact of an increase in the US interest rates on the value of the Japanese yen and the movements of capital between the US and Japan.

A: as stated before, the increase in the American interest rates will rise the demand for dollars that will increase their price; this higher price is due to a higher demand with respect to the current dollar offer (monetary base). In the case of the Yen against the dollar, a stronger dollar (higher price) will push the yen’s price because some capitals will want to go to US in order to take advantage of the higher rates; this capital exit from Japan will reduce the demand for yens that will push down its price and will also increase the local prices of Japan, creating and inflationary scenario thanks to the lower price of the currency.

Q 4. Assume that you have a gold shop in Qatar and that the demand for gold is elastic. Explain what you would do if you know that the interest rates in the us will rise?

A: The positive elasticity of the gold’s price is just the sensitivity of its demand with respect to a rise in its price; therefore, knowing that a rise in US interest rates will decrease the price of gold thanks to a rise of deposits in US banks. I, as the owner of the store, will stop selling gold until the price stabilize, or at least try to sell less gold in order to neutralize or reduce the effect of the reduction in price of gold through an artificial scarcity of the metal in the local economy.

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