Question

Recently the Fed has been watched carefully on their decision on interest rates in the US. Discuss and provide an example of interest rate risk to a MNC given an example of what you think the effect will be on an increase or decrease of rates and why? Provide a real example on this topic and your opinion. Also briefly mention the domestic and global effects of rate changes and why?

Answer 1

Interest rate is one of significant tool for controlling the monetary policy.

The objective of monetary policy is to ensure adequate flow of Money in the economy of country. That why it is concept of macro economics.

In USA monetary policies is set by Fed that is federal reserve.

Change in the interest rate depends on the state of the economy.

In case of  recession or depression fed ensure low rate of interest. So banks can give more loans to businesses.

Example : During period from 2007 to 2008 there was recession in global markets including USA. So to counter that fed reduces the discount rate that is rate at which fed gives loans and advances to commercial banks. Rate of interest by fed and discount rate is same concept.

In case of inflationary pressure fed will try to stop flow of money in economy in order to reduce the inflationary pressure. Fed can achieve the goal by increase in the discount rate.

Effect on domestic and global market:

The change in rate of interest has multi faced effects on both domestic and global market.

With decrease in rate of interest loans will become cheaper so world player will also like to set up business in the market. This surely have an impact on the domestic player with increase in the competition. Increase in competition will have positive impact on domestic customers

With the increase in rate of interest loans will become costly so it will very difficult for domestic and international player to maintain existing level of business. Reducing the level of international competition will have positive impact on foreign customers.