Application Report 2 Essay Example | Topics and Well Written Essays - 500 words

Application Report 2 - Essay Example In other words, if there is inflation and the price of commodities is high the Federal Reserve has to lower the interest rates to make the cost of living affordable and consequently ease on commodity prices. The reverse is also true, in that the Federal Reserve can increase interest rates to avoid inflation. In this case, the Federal Reserve is grappling with the issue of whether to increase interest rates at a time when the economy is falling apart. At this juncture, the Federal Reserve should not even think about increasing interest rates because the cost of living is already unbearable. Increasing the interest rate would only make the situation worse. This is because consumers would not be able to afford borrowing from the banks. High interest rates discourage people from borrowing from the bank. This is because the federal funds rate is also high too. The federal funds rate is the rate at which other banks borrow money from the federal bank (How Interest Rates affect the stock market, 2009). Therefore, increasing interest would not only affect customer borrowing but would also hurt the local banks that make money by lending loans to their customers. In addition, high interest rates would also mean higher mortgage payments. This is because the mortgage paid out by customers would go up because of high interest rates. Auto loans on the other hand would be expensive because of higher interest rates. The loan payments made every month are usually a product of interest rates and the principal amount therefore would go up as a result. The interest rates could also have some far-reaching implications when it comes to businesses, which are seeking to expand. High interest rates would discourage business from expanding due to unfavorable rates and this could have a ripple effect on the economy. This could have a negative effect on the economy as a whole. The stock market survival depends on perception. In a period when the interest rates investors, tend to be