Analysis of Federal Reserve Policies and Economic Impact

This assignment analyzes the Federal Reserve's monetary policy, focusing on interest rate adjustments and their impact on the U.S. economy. It begins by summarizing the Fed's recent policy of lowering interest rates to stimulate economic growth, arguing that this policy increases the money supply, investment, and aggregate demand, ultimately leading to economic expansion. The assignment then explores the effects of this policy on the supply and demand for goods and services, detailing how increased lending and disposable income influence consumer behavior and production. It also addresses potential drawbacks of maintaining low interest rates for extended periods, such as reduced bank income, increased risky investments, and discouragement of savers, referencing historical examples including the impact of low interest rates in Europe and a biblical perspective on interest. Finally, it discusses the historical use of currency in the Bible, illustrating how its supply affected the economy, drawing parallels to modern economic principles.

Running head: FED “PRESSURES” ON THE ECONOMY
Fed “Pressures” on the Economy
Name of the Student
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1FED “PRESSURES” ON THE ECONOMY
Table of Contents
Answer a.....................................................................................................................................2
Answer b....................................................................................................................................2
Answer c.....................................................................................................................................3
Answer d....................................................................................................................................3
References..................................................................................................................................5

2FED “PRESSURES” ON THE ECONOMY
Answer a
The policy the Federal Reserve is intended to take as per the Chairman’s Quandary to
counter the recent situation of the economy in United States is to lower the interest rate
(Farnham, 2014). The objective of the Federal Reserve behind such a policy of lowering
interest rate is to boost the economic growth. It can be agreed that the policy will turn out to
be effective because the way an economy responded generally to a reduction in interest,
increases the output of the economy. The decrease interest rate increase amount of lending
that means there will be increase in liquid money in the economy. Therefore, money supply
increases and the economy will expand, as there will be more investment and increase in
aggregate demand. With rise in aggregate demand price supply will also increase with
increase in employment and price level. Thus, there will be over all growth in the economy.

3FED “PRESSURES” ON THE ECONOMY
Figure 1: Interest rate and Money
Supply Figure 2: Economic
growth
Answer b
Increase in money supply via
increased lending in the economy, the firms
will get extra amount for investment and they will employ more to expand business. With
induced effect, disposable income of individuals rise. Individuals will consume more as
income increases (Liu et al., 2015). Therefore, demand for goods and services will rise with
decrease in interest rate. Perceiving the increased demand, the manufacturers and service
providers will supply more of goods and services. Thus, both supply and demand rises with
cut in interest rate.
Answer c
Several problems might arise if the interest rate is kept low for a long time, among
them the most important are decrease in income of banks, increase in unplanned investment
that lead to failure and thereby increases instances of loan default and savers get discouraged,
as low interest rate would not fetch enough interest income (Bean et al., 2015). Apart from
this, the economy would not be able to deal with recession in future by using interest rate cut
policy because zero bound interest cannot be lowered further. These effects are found in the
case of existence of long period of low interest rate in Europe, implemented by the Central
Banks to encounter the effect of financial crisis occurred in 2008. In Bible, charging interest
rate on lending provisions and loans to underprivileged is prohibited and charging interest
rate with collateral is not allowed too. Hence, low interest rate regime is good for the

4FED “PRESSURES” ON THE ECONOMY
economy but as it increases bad investments and burden of savers, it is not acceptable. Thus,
historically low interest rate affects the biblical economy too.
Answer d
In the initial days, the currency used as mentioned in the Bible was in material form
such as rings and bars of silver and gold. The term for currency was keceph, and the unit for
currency was shekel. As stated in Bible (1Ki 10:29), Solomon paid 600 shekels for each
chariots and 150 shekels for each horse (James, 2015). Hence, the supply of this form of
currency was very important during that period because without such currencies trading of
goods was not possible as there was no digital money or currency back then. However, as
there was no concept of interest payment during that time, saving was not a fruitful option
and thus consumption was the priority. Therefore, with change in supply of the currency,
consumption changes accordingly. Thus, in those times also supply of currency affected the
economy similarly as it does in the present day economy.

5FED “PRESSURES” ON THE ECONOMY
References
Bean, C. R., Broda, C. M., Itō, T., & Kroszner, R. (2015). Low for long?: Causes and
consequences of persistently low interest rates. ICMB, International Center for
Monetary and Banking Studies.
Farnham, P. (2014). Economics of Managers. (3rd ed.). Georgia State
University: Pearson. pp. 361.
James, O. (2015). The International Standard Bible Encyclopedia.
Liu, H., Wahl, T. I., Seale Jr, J. L., & Bai, J. (2015). Household composition, income, and
food-away-from-home expenditure in urban China. Food policy, 51, 97-103.