Monetary Policy - Captain Fred

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

• Increase b/c consumers feel good

• Inflation

• Increase in response to consumers

• Consumer Spending and Confidence

• Increase as prices go up

• Business Investment

• Decrease because more jobs are created

• 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 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?

• Slows b/c of higher borrowing costs

• Inflation

• Slows b/c higher interest rates

• Consumer spending

• May rise b/c of slower Bus. Inv.

• Business Investment (Bus. Inv.)

• Higher as Fed tightens money supply

• Unemployment

• Slows as Fed increases int rates

• 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

• Unemployment

• High

• Inflation

• Spending is strong

• Business Investment

• Low b/c investment is high

• 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 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 b/c of slower spending

• Consumer spending

• May rise b/c of slower investment

• Business Investment

• Slows-interest rates make expansion rise

• Inflation

• Higher b/c of tighter monetary policy

• Interest Rates

• 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?

• Begins to rise as business slows

• Inflation

• Slows

• Business Investment

• May begin to slow as spending slows

• Unemployment

• Begins to slow as hiring slows

• Consumer spending and confidence

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?

• Increase as borrowing costs fall

• Business Investment

• Increase as consumers feel better w/jobs

• Inflation

• May fall as businesses increase spending

• Consumer Spending

• Lower to encourage borrowing

• Unemployment

• May begin to rise

• Interest rates

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

• Unemployment

• Increasing b/c consumers are buying more

• Business Investment

• Increasing with more govt spending

• Inflation

• Falls as more jobs increase

• Consumer spending and confidence

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.