Question

Please help me

* Students must prepare a three to four page typewritten double spaced paper on a current macroeconomic topic that is pertinent to class material. This can be chosen from the textbook, newspapers, magazines, or current economics periodicals. Students will be expected to analyze and evaluate the issue or topic and provide recommendations. Here are some sample topics: The impact of drug legalization on the economy Using economics, how would you fix the homeless problem in California? - Is the bullet train viable in California'? How do interest rates affect consumers and their purchasing patterns How could the "Great Recession" have been prevented? Countries that do not believe in comparative advantage - How could the Federal Government reduce the national debt? the economy? the economy? If you were the President of the U.S. what would you do to improve Which presidential candidate will have the most profound impact on

Answer 1

How do interest rates affect consumers and their purchasing patterns?

Changes in interest rates undoubtedly affect the spending habits of people. But changes in consumers' monthly expenses depend on several other factors such as consumer price index (CPI) of a region, income of people, supply network, tastes and preferences of people. Thus interest rate is not sole determinant of the purchasing patterns of consumers. The interests rates may increase, decrease or remain constant in the monetary policy of the central bank. The increase in lending interest rates restricts the spending capacity of consumers on various activities such as housing, education, health and personal. Similarly increase of interests on investment plans such as mutual funds, equity stocks, fixed deposits, monthly investment schemes (MIS) also increases the savings as well as purchasing power of people. However, in reality, the increase in consumers' savings does not proportionately increase their monthly spending. According to noted economist and proponent of investment multiplier, Keynes, changes in interest rates affect two things i.e., marginal propensity to consume (mpc) and marginal propensity to save (MPS). Marginal propensity to consumer is change in consumers' spending divided by change in consumers' income. Mathematically it can be depicted as

   MPC= $\partial$C/$\partial$I where $\partial$C= change in consumer's expenditure

                        & $\partial$I= change in consumers' income

Similarly MPS = $\partial$S/ $\partial$I where $\partial$S= change in consumers' savings

                                    & $\partial$I = change in consumers' income

Mathematically, MPS +MPC = 1 which means if consumers' savings rate increases following the increase in income, it will reduce the consumers' spending rate. According to keyne's multiplier theory, the investment in an economy boosts industrial production that creates new employment opportunities, raises consumer's income and purchasing power. With more income and less interest rates, consumers will have more money to spend on goods and services. This will increase market demand and further raises the production level in an economy. Therefore, the increase in investment has multiplier effects in an economy.

When central bank such as FED increases the interest rates, it increases the interest burden of people in US economy and as a result people will borrow less money from banks and financial institutions. Thus increase in borrowing rates will decrease the purchasing power and spending in the economy. The consumer price index (CPI) defines the existing price level of a region. The price level or inflation also affects the buying patterns of consumers and to boost the market demand, central Bank has to lower the borrowing rates to boost the consumer demands. Economic Recession or meltdown also adversely affects the consumers's income and their overall expenditures. During great depression of 2008-2009 in US economy, the FED government slashed down the CRR ratio that enabled more funds to commercial and private banks and Federal government too lowered down the tax rates to bring the US economy out of recessionary trap. This resulted positive impacts in consumers' income, industrial production, aggregate demand and supply functions.