W fp100 r1 w1 economic, x des chrome extension://bpmcpldpdmajfigpchkicefoigmkfal
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W fp100 r1 w1 economic, x des chrome extension://bpmcpldpdmajfigpchkicefoigmkfalc/views/app.htnm worksheet (1).doc located in the Additional Reading and Video Resources link on your course page. Respond to each of the following questions in your own words. Each response should be at least 50 words. 1. A nominal interest rate is defined as the opportunity cost of holding or using money Explain what you understand this definition to mean. 2. When the economy is in a recession, the Federal Reserve usualy cuts interest rates Why would the federal govermment do this? How does your saving and spending profile change depending on the state of the economy, i. whether the economy is in a recession versus expansion? Do interest rates play a role in your decisions? Why or why not? 3. 4. If interest rates are at a level of 1% and expected inflation is 2%, would you prefer saving or spending your money? Justify your answerExplanation / Answer
1. Nominal interest rate is the opportunity cost of holding or using money. We know that opportunity cost is cost of using alternative. When we are keeping the money in hand or holding it that means it does not pay any interest. Similarly when we are using the money in another purpose we are keeping it in bank or financial institutions. So it is not giving any interest. When we are keeping the money in the bank or any financial institution it is giving nominal interest rate. So either we can earn nominal interest by keeping it in bank or we can hold it in our hand or use it in another purpose. So holding money or using it in another purpose creating or making the opportunity cost or loss of nominal interest.
2) When the economy is in recession it means the economy suffers from lack of demand and the condition of investors is very much pessimistic. To boost up the demand there need to create the demand and as well as theere need to maintain the supply. When tax rate is cut the disposable income of the people rises and investors also gets some relief in terms so there expectation increase. It ultimately helps to boost up the demand and supply.
3) During the time of recession and expansion people's decision about saving and spending changes. It changes because of state of the economy. During the time of recession people wants to hold money in hand or they do not wants to save it also and they try to keeping it in hand. At the time of recession the expenditure of the people is low because of low demand both investment and consumption. But during expansion the investment demand is comparatively high. The interest rate during the time of recession is very low. People expect interest rate will go up.
4) If interest rate is at 1% level and expected inflation rate is 2% then it is prefer to spending the money. Because the real interest rate due to savings will be (1-2)% = -1%. If it saves then it looses because of expected higher rise in price compare to rise in monetary value. The rise of money value due to savings will be lower than rise in price level. So it is always better to spend it now rather to save it. So spending is always preferred to save in this scenario.
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