Monetary Policy - Captain Fred

How will the new wave of consumer spending affect each of the following items?

• Increase in response to consumers

• Business Investment

• Increase as prices go up

• Unemployment

• Increase b/c consumers feel good

• Inflation

• Decrease because more jobs are created

• Consumer Spending and Confidence

Answer explanation

As consumers spend more money, they will increase demand. This causes businesses to want to sell more items and they increase their spending. As they make more items, they need to hire more workers. This leads to higher prices and inflation.

In response to the increasing inflation from consumer spending, how should the Fed respond?

• Tighten the money supply

• Nothing

• Loosen the money supply

Answer explanation

The Fed wants to tighten or bring down the money supply when there is inflation.

Based on the Fed's reaction to the rising consumer spending, what will happen?

• Higher as Fed tightens money supply

• Inflation

• Slows b/c higher interest rates

• Business Investment (Bus. Inv.)

• May rise b/c of slower Bus. Inv.

• Unemployment

• Slows as Fed increases int rates

• Consumer spending

• Slows b/c of higher borrowing costs

• Interest rates

Answer explanation

The Fed will work to increase interest rates in response to inflation. This causes the price to borrow money to go up since higher interest rates cause items to cost more. Both consumers and businesses are affected by the higher interest costs. This will slow business investment and help lead to higher unemployment.

How will inflationary winds affect the following items?

• Investment is strong

• Business Investment

• Low b/c investment is high

• Inflation

• Spending is strong

• Consumer spending and confidence

• High

• Unemployment

Answer explanation

As consumers spend more money, they will increase demand. This causes businesses to want to sell more items and they increase their spending. As they make more items, they need to hire more workers. This leads to higher prices and inflation.

In response to the inflationary winds blowing prices higher, what should the Fed do?

• Tighten money supply

• Nothing

• Loosen money supply

Answer explanation

The Fed wants to tighten or bring down the money supply when there is inflation.

What impact will this Fed policy have on the following items?

• Higher b/c of tighter monetary policy

• Consumer spending

• Slows b/c of slower spending

• Interest Rates

• May rise b/c of slower investment

• Business Investment

• Slows-interest rates make expansion rise

• Inflation

• Slows - interest rates increase costs

• Unemployment

Answer explanation

The Fed will work to increase interest rates in response to inflation. This causes the price to borrow money to go up since higher interest rates cause items to cost more. Both consumers and businesses are affected by the higher interest costs. This will slow business investment and help lead to higher unemployment.

Business Investments slow. What impact will this have on the following?

• May begin to slow as spending slows

• Unemployment

• Slows

• Inflation

• Begins to rise as business slows

• Consumer spending and confidence

• Begins to slow as hiring slows

• Business Investment

Answer explanation

Businesses lose confidence in sales and consumer spending. They will slow expanding their businesses. This causes work slowdowns and job layoffs leading to higher unemployment. Consumers lose confidence and slow their buying. Less demand leads to a fall in prices and inflation begins to fall.

In response to slowing business investment, what should the Fed do?

• Tighten money supply

• Nothing

• Loosen money supply

Answer explanation

A slower economy means the Fed wants to jumpstart the economy and try to encourage people to spend more money. This means they want to lower interest rates so borrowing is cheaper and people will be willing to buy more.

How will the Fed's policy affect the following?

• Lower to encourage borrowing

• Business Investment

• May fall as businesses increase spending

• Unemployment

• May begin to rise

• Inflation

• Increase as consumers feel better w/jobs

• Interest rates

• Increase as borrowing costs fall

• Consumer Spending

Answer explanation

Businesses aren't spending money to expand. As a result, businesses are laying off workers and unemployment is rising. The Fed wants to lower interest rates so that it's cheaper to borrow money. As both consumers and businesses begin to borrow because of lower interest rates, the economy picks up and prices (inflation) may begin to rise.

Government spending is rapidly increasing.

• Rising with spending

• Consumer spending and confidence

• Falls as more jobs increase

• Unemployment

• Increasing b/c consumers are buying more

• Business Investment

• Increasing with more govt spending

• Inflation

Answer explanation

As the government spends more money, they will increase demand. This causes businesses to want to sell more items and they increase their spending. As they make more items, they need to hire more workers. This leads to higher prices and inflation.