Monetary Policy - Captain Fred

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

• Decrease because more jobs are created

• Unemployment

• Increase b/c consumers feel good

• Inflation

• Increase in response to consumers

• Business Investment

• Increase as prices go up

• 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

• Consumer spending

• Slows b/c of higher borrowing costs

• Inflation

• May rise b/c of slower Bus. Inv.

• Interest rates

• Slows b/c higher interest rates

• Unemployment

• Slows as Fed increases int rates

• Business Investment (Bus. Inv.)

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?

• Low b/c investment is high

• Unemployment

• High

• Consumer spending and confidence

• Investment is strong

• Business Investment

• Spending is strong

• Inflation

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?

• Slows-interest rates make expansion rise

• Business Investment

• May rise b/c of slower investment

• Inflation

• Higher b/c of tighter monetary policy

• Unemployment

• Slows - interest rates increase costs

• Consumer spending

• Slows b/c of slower spending

• 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.

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

• Begins to rise as business slows

• Business Investment

• Begins to slow as hiring slows

• Inflation

• May begin to slow as spending slows

• Consumer spending and confidence

• Slows

• Unemployment

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

• Inflation

• Increase as consumers feel better w/jobs

• Unemployment

• May fall as businesses increase spending

• Interest rates

• May begin to rise

• Consumer Spending

• Increase as borrowing costs fall

• Business Investment

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.

• Increasing b/c consumers are buying more

• Business Investment

• Falls as more jobs increase

• Inflation

• Increasing with more govt spending

• Consumer spending and confidence

• Rising with spending

• Unemployment

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.