Question

3. Describe changes in equilibrium interest rates (shifts in the demand for bonds and shifts in supply of bonds). describe one factor in your comment on this question.

Answer 1

One way that small business owners are influenced by macroeconomics is through monetary policy. Monetary policy is the approach implemented by the Federal Reserve on interest rates and the release of new money into the economy, both of which have an effect on the supply of money. The money supply remains stable at the equilibrium interest rate. The interest rate of equilibrium is related to demand and money supply. The rate of interest arises at the point where the demand for a given amount of money is equal to the money supply. Typically, economists chart this phenomenon on graphs for illustrative purposes and facilitate understanding.

With the economy and monetary policy, the equilibrium interest rate varies. As income increases both private and corporate the demand for cash increases. This demand increase raises the interest rate of equilibrium. Inflation a rise in goods and services costs has similar effects. When the Federal Reserve sets a higher interest rate than the equilibrium interest rate, the money supply the amount of money circulating in the economy exceeds what individuals and businesses want to hold in cash. Instead, by buying bonds, households and companies try to reduce their cash holdings.

The amount of money in circulation is inadequate for households to participate in routine, daily transactions when the interest rate is lower than the equilibrium interest rate. This leads to an excess demand for money. The excess demand motivates individuals and families to sell and deposit their bonds and keep the funds in their accounts of inspection. This transition to cash raises the money supply, eventually leading to a lowering of the interest rate of equilibrium.