Looking for additional information for how interest rates affect monatary polici

Question

Looking for additional information for how interest rates affect monatary policies during the 1980-1990 in the U.S.

Monetary Policy A. Discuss the impact of interest rate changes on general business decision-making. Consider expanding or contracting operations, deciding to B. C. undertake or postpone additions of capital (i.e., increasing productive capabilities), or increasing or decreasing inventories. Explain the causal relationship between the federal funds rate and market rates of interest. Using your analysis of interest rates during the time period as a guide, explain the internal and external impacts on the economy

Explanation / Answer

A)

If interest rates increase, borrowers or people in debt will have lesser money to spend as they will be paying more interest to the lenders. So, additions of capitals must be postponed and inventories must be decreased as much as possible.

B)

If federal funds rate increases, market interest rate will also increase. Federal funds rate generaly increases by 1% annually.

C)

Increased interest rates means increased cost of borrowing which leads to reduced investment which in turn leads to slower economic growth. It also leads to higher mortgage payments which leads to reduced consumption which again leads to slower economic growth. It also results in lower inflation by flow of hot money.

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