This website uses cookies to ensure you have the best experience. Learn more

Role Of Federal Rate In Economics

1223 words - 5 pages

The Federal Funds Rate is the interest rate that Federal Reserve uses to trade funds with banks. Changes in this rate can trigger a chain of events that can be beneficial or devastating to the economy. If a bank is charged a higher interest rate to trade money or take out a loan, then the increase will be passed on to their customers, causing them to pay higher transaction fees or more interest. Each month, the Federal Open Market Committee meets to determine the federal funds rate. This in turn affects other short term interest rates. The determining rate immediately impacts the rates at which banks borrow money and the interest rates the banks use to charge their customers on loans. If the rate raise is too high, then money flow drops dramatically and banks and customers curtail lending and borrowing, waiting until a better rate is reached. This effect can have a dramatic impact on the economy and economic spending.
Long term interest rates differ from short term interest rates in that they are not directly influenced by the Federal Funds target rate. Usually investors will want a higher interest rate for a long term investment. A higher Federal rate will trickle down to consumers, resulting in a higher interest rate to borrow money. Consumers will then reduce spending, slowing down the economy. This was seen in the housing market when adjustable mortgage rates went up. People could not afford their payments any longer and their homes went into foreclosure. This drove home values down, which lowered homeowners’ equity against which they could borrow, causing panic and a dramatic decrease in spending.
Unemployment can also be directly affected by the Federal Reserve. If the Federal rate goes up, there will be less spending which means less revenue for businesses. If revenues do not result in a profit, then businesses will not operate at the same rate, resulting in scaling back operations. Cut backs could be that employees take pay cuts, resulting in even less money available for spending. Cut backs can also be that the number of employees is reduced, causing the remaining workers take on more of a work load. The employees laid off will increase the number of people drawing unemployment, and increase the number of job seekers trying to get a reduced number of jobs.
Obviously all of these factors can have some kind of effect on the economy. With cut backs comes a slowdown in output and production from businesses and can cause inflation to occur where people make the same or less amount of money but the price of goods goes up. Essentially, interest rates control the whole economy: if interest rates go up then the economy slows down and vice versa. However if interest rates go too low or stay low for a long period of time it can lead to inflation which also hurts the economy. In essence, higher interest rates are not necessarily a bad thing. Higher interest rates can curb inflation, meaning your pay will go further. A good example of this is the...

Find Another Essay On Role of Federal Rate in Economics

The Economics of Federal Defense Policy

2569 words - 10 pages Policies under Clinton Administration, roughly 8 pages , ok really, nice job!(turn on wordwrap)The Economics of Federal Defense Policy - Political Science-----------------------------------------------------------Three out of four Americans polled in the 1992 election year believed that the United States was heading in the wrong direction. With such an overwhelming consensus, the country hired a new president to attempt to fix the vital issues

Role of the Federal Reserve Bank Today

1880 words - 8 pages is more effective with the support of supervision. Additionally, the Monetary policy is the process by which the monetary authority of a country controls the supply of money to promote economic growth and stability. In order to keep inflation in check, Monetary policy is also used to raise the federal funds rate. The Fed is allowed to use its monetary policy tools to lower federal funds rate. If it was not for Alexander Hamilton’s determination

The Role of the Federal Reserve in the United States Economy

1480 words - 6 pages In this essay I will discuss the role of the Federal Reserve in the United States economy. In doing this I will look first at open market operations as a tool to influence money supply. Then, I will look at discount rate and federal funds target rate and how the Federal Reserve uses it to influence money supply. Lastly, I will look at required reserve ratio and  deposit expansion (money) multiplier as a tool the Federal Reserve uses to influence

Factors that have driven the U.S Federal Reserve's manipulation of interest rates via the Federal Funds Rate

2302 words - 9 pages MANAGING FINANCIAL RESOURCES Assignment onManaging Financial ResourcesSubmitted by:YESHWANTH RAJ PMBA - Executive Stream (Full-time)November 2006No. of words: 1998SYNOPSISThis Paper considers the factors that have driven the U.S Federal Reserve's manipulation of interest rates via the Federal Funds Rate. A change in interest rate affects the investment, consumption, government expenditure, exports and imports level in the economy. Along with it

The Role of Economics in the Lives of Puerto Rican Migrants

739 words - 3 pages Economics has an important role in the lives of Puerto Rican migrants, who come to the United States searching for a better life and employment. It’s the economic characteristics of both the Puerto Rican island and the United States, which causes a growth in the mobilization of many Puerto Rican migrants. Economics causes the continuing trend of transition between the island and the United State. After the United States acquired the rights to

The Role of the Supreme Court, Government, Economics, and Protests in the Civil Rights Movement

1638 words - 7 pages There were four different elements that contributed to the success of the Civil Rights Movement: the Supreme Court, the Government, the economic situation of the time, and the protests of the movement. The role, which the Supreme Court's played in the success of the civil rights movement, was essentially one of neutrality. The Supreme Court ordered the segregation of schools and other public facilities, known as the policy of separate but equal

The Federal Government and its Role in the States

617 words - 2 pages , state and the federal government do not know who the responsibly lies on. One example is Katrina in New Orleans, when the hurricane hit, both the federal government and state government stood back and waited for one to act first. The state and federal government have changed what issue and responsibility they have. In the past the federal government took care of health care but today they have a more active role in education and health care

Rate of Respiration in Yeast

2513 words - 10 pages Rate of Respiration in Yeast Aim: I am going to investigate the rate of respiration of yeast cells in the presence of two different sugar solutions: glucose, sucrose. I will examine the two solutions seeing which one makes the yeast respire faster. I will be able to tell which sugar solution is faster at making the yeast respire by counting the number of bubbles passed through 20cm of water after the yeast and glucose

This describes the changes that took place in the 1930's regarding the role of the federal government to helping people in economic hardship

1421 words - 6 pages depression. The New Dealers had created a house of cards that was upheld by government money.For the first time in history the federal government came to play a role in people's lives that would have been unthinkable before 1933 and in many aspects it modernized American rural sectors, and in the American context can be thought of as a revolution.A dark side to the New Deal was the extraordinary growth in the size of government. Large government programs

The Role of International Trade - IB Economics - Study Note

1351 words - 6 pages 4.4 THE ROLE OF INTERNATIONAL TRADE I. Trade problems facing many economically less developed countries: With reference to specific examples, explain how the following factors are barriers to development for economically less developed countries. 1. Over-specialisation on a narrow range of products · Developing countries, especially the lower income ones, tend to specialise in the production and export of only a few goods (usually primary goods

Describe the events and factors that propelled the development of the American West. What role did the Federal Government play in the development?

674 words - 3 pages occurred so rapidly that our early settlers began to experience nostalgia of sorts for the simpler life they had led before. For a small filing fee the Federal Government would grant you a title to 320 acres of land. There was one small catch though in order to remain eligible for that amount of acreage you had to world the land. The government was shrewd enough to realize that by mandating the land could not lay idle they could easily

Similar Essays

Role Of Federal Reserve Essay

1128 words - 5 pages Federal Reserve exists to play a role as the last resort of lender for the US economy where International Monetary Funds (IMF) exists to play a similar role for global economy. The International Monetary Fund has become a powerful international institution that provides loans to governments of member countries unable to meet their international financial obligations, such as to public and private lenders or to trade partners. The IMF has played

Role Of Federal Reserve In Casuing The Great Depression

2546 words - 11 pages The Great Depression is undoubtedly one of the most significant events in American and world history. It was the most widespread depression in the 20th century affecting most nations in the world and lasting for as long as a decade. However, there still remain unanswered questions regarding the cause of the great depression. One of the most debated topics regarding the Great Depression continues to be the role of the Federal Reserve (Fed) in

The Role Of Federal Agencies In Fighting Digital Crime

781 words - 3 pages process to gain an upper hand in fighting digital crime. In addition, state and local law enforcement expressed concerns about resource constraints and apprehension regarding expertise and jurisdictional authority. State and local agencies are having difficulty in establishing their own role in solving computer crimes. Higher-profile cases of computer crimes are rarely handled at the local level, because federal expertise and resources are required

The Role Of Federal Agencies In Fighting Digital Crime

834 words - 4 pages cooperate to fight against computer crimes and terrorist threats. Local law enforcement agencies deal with more challenges than federal law enforcement agencies, which includes getting the necessary training, equipment, updated criminal codes designed to complement current enforcement efforts, and resources. The lack of training in computer crimes for most of local law enforcement agencies is a serious issue when trying to prosecute computer crimes