Identify and describe two different roles that interest rates play in the economy. Does a
change in an interest rate indicate that a change in some part of the economy is
occurring? Explain your answer.
Interest rates affect the economy in many ways, however , the effects are not seen
immediately. When a change in interest rates occurs, most affects will not be seen for a
while, due to a time lag. An obvious affect that interest rates have on the economy is that
they determine how consumers spend their money, and how willing they are to spend.
When rates are higher, people are less willing to spend and/or make investments because
cost is high and there is more risk involved. For example, when interest rates rise, so do
mortgages, therefore the housing demand decreases and the market suffers. Conversely,
when interest rates decline, consumers disposable income gets bigger and this leads to
more spending power and in turn the economy benefits because consumers are more
willing to spend and demand for certain items increases. Interest rates also have an affect
on the value of currency. Low interest rates tend to cause a depreciation in the currency
rate of exchange. This has a positive effect on the country because demand for domestic
items rise, and exports may increase. This helps balance the equilibrium
level of the
national income. When a change in interest rates occurs, it does mean that the economy is
going through changes, however because of the time lag, by the time that the rates
increase, the change in economy has been going on for some time prior to the increase or
decrease of rates. In general interest rates change because of the consumers spending and
incomes, so it is not unusual, or a drastic change when rates increase or decrease because
it is affected by the consumer and will therefore always be changing.
1. In your view, what is the principal cause of income inequality? Why?
2. Is income inequality as it exists in the United States at present beneficial to the market?
Why or why not?
3. Can poverty be eliminated? Why or why not?
There are many factors that can contribute to income inequality. One of the most evident
factors, for me, is occupation. Different people have different occupations, and therefore
incomes, because of their human capital. Human capital is a major determinate in what
occupation a person will have. This is why economic theory suggests that those with
more experience and a higher education level have a higher income level.
To obtain a healthy economy, some income inequality must be present. Income inequality
creates economic diversity, but when income inequality becomes a primary focus, such as
during a recession or inflation, problems can occur. Currently, income inequality is a
primary focus in this economy. Because of the increasing gap within income levels,
stress, tension, and desperation is very present in our society. This can be a very
dangerous thing. There will always be those who have a high income and those who have