Analyzing Interest Rates

The Federal Reserve has control over the nation’s monetary policy. Through adjusting the required reserve ratio, buying and selling government bonds on the open market, or adjusting the discount rate, the Fed can influence interest rates and the money supply in the country. When we talk about interest rates, it’s important to distinguish between long-term and Short-term interest rates. Short-term interest rates are directly affected when the Fed changes its federal funds and discount rates and are for loans made for short periods. long-term interest rates are set by market forces. Lower long-term interest rates encourage investment by businesses and consumers because the cost of paying back the money over a long period is low. Keep this distinction in mind while you complete the following activity.

Part A

Considering the current state of the economy and what you know about monetary policy, do you think the Federal Reserve should increase interest rates, decrease interest rates, or keep interest rates constant? Why?

Part B

Using an Internet search engine, find a website or an article that contains an editorial or opinion piece that shares your opinion and copy the URL in the space below. Keep in mind that it might take you some time to find a good article, so don’t automatically take the first one you find.

Part C

List three main points from the source you found that explain the author’s reasoning.

Part D

Based on what you have read, what bias might the author bring to his or her opinion?

Part E

Using an Internet search engine, find a website or an article that expresses the opposite to your opinion and copy the URL in the space below. Keep in mind that it might take you some time to find a good article, so don’t automatically take the first one you find.

Part F

List three main points from the source you found that explain the author’s reasoning.

Part G

Based on what you have read, what bias might the author bring to his or her opinion?

Putting It All Together: The Debate

Write 10 lines of dialogue each for two characters (20 dialogue lines in total). The dialogue must be economics related and relevant.
One character must take your viewpoint, and the other character must take the opposing viewpoint.
Script each character’s rationale for why the specific action they believe in should be taken.
Include each character’s main opposition to the opposing viewpoint.
Ensure that each character questions the other about points of perceived bias, with each character responding to the other’s question.

Solution Preview

Part A

The Federal Reserve bears the responsibility of regulating interest rates which in turn influence the banking and lending systems as well as other business exchanges. The Central Bank which usually decides the interest rates focuses on the future of the economy. As such, when the rates of inflation are predicted to increase, the bank usually encourages saving and reduced spending by increasing the interest rates. As a result, the government is usually able to regulate economic growth and reduce the levels of inflation. In the event that there is perceived decrease in the inflation, the Federal Reserve lowers the interest rates thereby increasing spending and allowing for the inflation to reach the required balance. As such, it is important that the rate of interest is regulated higher or lower than the normal rate to balance resources between banks and the Federal Reserve.

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