FIN100 Week 2 Discussions
1. The U.S. GDP results are constantly growing during the recent tree years. According to the research conducted by the Federal Reserve Bank of St. Louis, the GDP increased by 2,5 percent. Though, this is an average value and the GDP was 0.4 percent in the fourth decade of 2012.
Despite the fact the average rate of the GDP is not decreasing, the overall economical situation in the US is not becoming better. The main problems that affect the rates are expenses on the military issues and national debt. In addition, the absence of factories in the country leads to high unemployment level and thus to reduction of spending power. It is necessary to develop industry in the country in order to improve the situation with the GDP. Many American companies have manufactures in other countries like China and reduce the number of working places for US citizens. It might be also necessary to reduce the expenses on the army, because people are tired of wars for democracy in other countries and their welfare falls (Melicher 2011).
2. The Federal Reserve Board as kept the federal rate to a nominal rate in recent years as a reaction to global financial crisis. The rates of short-tem interests decreased nearly to the zero. The Federal Reserve Board also bought various securities to reduce long-term interest rates. It was made to support national economy, to decrease the inflation rate, and to moderate the rates on long-term interests. These actions lead to stabilization of prices in the market and the appearance of more working places. According to the information, given by the Federal Reserve,
“the Committee indicated that it currently anticipates that a target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than half a percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored” (The Federal Reserve Board).
3. The rate of inflation affects the sum of money the borrower needs to pay back for the goods he bought in credit. It is crucial to make an agreement between the borrower and the lender that will add the sum of the inflation rate to the stated interest rate (The Federal Reserve Bank of St. Louis). Even though the purchasing power will decrease with time, the lender and the borrower will find the agreement acceptable for both of them. For example, the family took a credit for a house for 30 years. The stated interest is 3 percent and the inflation is 4 percent per year. However, the prices for real estate will increase by 10 percent during this time. As a result, the ultimate sum the family will pay for the house will be lower then the current price in the market, even considering the inflation. When the family decided whether they needed a house or an outset for their business, they decided that their business might fail because of economical crisis and high inflation rates. This was an opportunity cost in this example.
4. Annuities can refer to monthly fixed payments for the house, systematic deposits to saving accounts and insurance payments. The main advantage of the annuity in paying for the house is its fixed price. It is possible to plan the family budget, because the sum does not change with the time. There is a possibility not to pay during the first months. It is also possible to reduce the end price by paying the whole sum in advance. Though, it does not take into consideration the inflation rate and the borrowers overpay in the end. The annuities are good for retirement planning, because they create a systematic basis for comfortable life in elderly years. Paying for the house in this way might not become a stress for family budget, insurance and saving account will provide a retired person with everything he/she might need.
Melicher, R. W. (2011). Introduction to Finance: Markets, Investments, and Financial Management. Illinois State University
The Federal Reserve Bank of St. Louis. Retrieved from http:// www. stlouisfed.org
Why are interest rates being kept at a low level? The Federal Reserve Board. Retrieved from http://www.federalreserve.gov/faqs/money_12849.htm