How Interest Rates Affect the U.S. Markets Discussion

Student Responses.

Please Cite all work.

Discussion 1:

After reading the beige book I discovered that there are some problems and concerns for the economy. Some of the concerns is volatility and slowing growth. There is also a labor shortage even with increasing wages, and increase in home prices with low inventory. The demand is greater than the supply causing a labor shortage. The demand for loans is starting to become greater than the supply also causing a shortage, and in turn causing an increase in interest rates.

With higher interest rates people are spending less, which accounts for the slowing growth in the economy. “Higher interest rates mean that consumers don’t have as much disposable income and must cut back on spending. When higher interest rates are coupled with increased lending standards, banks make fewer loans.” (Seabury, 2018).

All of this points to the economy being in an inflationary gap. To overcome this there would need to be a decrease in the money supply. This would shift the AD curve to the left bringing the economy back into equilibrium, eliminating the inflationary gap (Arnold, 2019). Taking the Keynesian viewpoint in order to eliminate the inflationary gap, natural forces will eliminate the inflationary gap, since wages and prices are inflexible downwards. By allowing the economy to fall back into equilibrium spending will decrease causing demand to decrease, interest rates will drop, while prices will remain the same or continue to rise. By allowing the economy to correct naturally the SRAS curve shifts to the left instead of the AD curve shifting to the left.

References:

Arnold, R. A. (2019). Economics (12th ed.). Cengage.

Seabury, C. (2018, December 21). How Interest Rates Affect the U.S. Markets. Retrieved March 5, 2019, from https://www.investopedia.com/articles/stocks/09/ho…

Discussion 2:

I was happy to find out how easy it was to find the information this week, but a bit intimidated at how much there was. I decided to just use the Kansas City region, which is where I live. It is nice that the information we are working with is so up to date. I hate to cut and paste, but here is the part that caught my eye: “Tenth District economic activity was roughly flat in December and early January, as growth in several sectors was offset by a slowdown in others. Moving forward, expectations were mostly positive for growth in the months ahead. Retail sales were strongly above year-ago levels, but growth in overall consumer spending was tempered by lower auto, restaurant, and tourism sales” (federalreserve.gov, 2019).

My first thoughts were to lower taxes somehow. As our text points out that could spur consumer spending and help the economy (Arnold, 2016). I thought maybe having a tax-free day might help. I encountered this the first time in Alabama a few years ago. Then I realized that my district covers many states, and we would have to get the federal government in on it. After some brief research, I also found out that this has very limited effects and may be more trouble than it is worth. Both sides see the tax-free days as regressive and tend to just bottleneck shopping (Povich, 2017). Out the window that goes.

After doing a little more thinking I thought “Wait a minute! This is the holiday time period. It makes sense that auto, restaurant, and tourism sales are down”. I heard from many sources that retail sales were strong this year. I have never bought a vehicle in December, which is historically an expensive month. Other than tourists’ spots, like a ski lodge, December vacations don’t tend to be overly popular. It would stand to reason that the money from the three sections would funnel into retail sales. So what to do about spending, employment, and prices?

Nothing! As discussed in week 6, I am a classic economist. The economy tends to run in cycles and correct itself (Arnold, 2016). I think that those weak sections of the economy will fix themselves as tax-return season and warmer weather comes around. We would have to look at many years’ worth of data to find good trend data. I hate to be Laze-fare, but with the positive forecast I am not alarmed at all.

I hope several people decided to focus on their districts. Let me know if this makes sense to you.

Resource:

Arnold, R. (2016). Economics (12th ed.). Boston, MA: Cengage Learning.

Federalreserve.gov (2019). Retrieved from https://www.federalreserve.gov/monetarypolicy/files/BeigeBook_20190116.pdf (Links to an external site.)

Povich, E. (2017). States Start to See More Cost Than Benefit to Tax-Free Holidays. Retrieved from http://www.governing.com/topics/finance/sl-sales-t…