Assignment no.

Q. 1 Construct a simplified model of an economic system and explain the

circular flow of income.

Ans

The circular flow model demonstrates how money moves through society.
Money flows from producers to workers as wages and flows back to producers as
payment for products. In short, an economy is an endless circular flow of money.

That is the basic form of the model, but actual money flows are more
complicated. Economists have added in more factors to better depict complex
modern economies. These factors are the components of a nation's gross
domestic product (GDP) or national income. For that reason, the model is also
referred to as the circular flow of income model.
❖ The circular flow model demonstrates how money moves from producers to
households and back again in an endless loop.
❖ In an economy, money moves from producers to workers as wages and then
back from workers to producers as workers spend money on products and
services.
❖ The models can be made more complex to include additions to the money
supply, like exports, and leakages from the money supply, like imports.
❖ When all of these factors are totaled, the result is a nation's gross domestic
product (GDP) or the national income.

❖ Analyzing the circular flow model and its current impact on GDP can help
governments and central banks adjust monetary and fiscal policy to improve
an economy.

The basic purpose of the circular flow model is to understand how money moves
within an economy. It breaks the economy down into two primary players:
households and corporations. It separates the markets that these participants
operate in as markets for goods and services and the markets for the factors of
production.

The circular flow model starts with the household sector that engages in
consumption spending (C) and the business sector that produces the goods.
Two more sectors are also included in the circular flow of income: the
government sector and the foreign trade sector. The government injects money
into the circle through government spending (G) on programs such as Social
Security and the National Park Service. Money also flows into the circle through
exports (X), which bring in cash from foreign buyers.

In addition, businesses that invest (I) money to purchase capital stocks contribute
to the flow of money into the economy.

Just as money is injected into the economy, money is withdrawn or leaked

through various means as well. Taxes (T) imposed by the government reduce the
flow of income. Money paid to foreign companies for imports (M) also
constitutes a leakage. Savings (S) by businesses that otherwise would have been
put to use are a decrease in the circular flow of an economy’s income.

A government calculates its gross national income by tracking all of these

injections into the circular flow of income and the withdrawals from it.

The circular flow of income for a nation is said to be balanced when withdrawals
equal injections. That is:
❖ The level of injections is the sum of government spending (G), exports (X),
and investments (I).
❖ The level of leakage or withdrawals is the sum of taxation (T), imports (M),
and savings (S).

When G + X + I is greater than T + M + S, the level of national income (GDP)

will increase. When the total leakage is greater than the total injected into the
circular flow, national income will decrease.

GDP is calculated as consumer spending plus government spending plus business

investment plus the sum of exports minus imports. It is represented as GDP = C +
G + I + (X – M).

If businesses decided to produce less, it would lead to a reduction in household

spending and cause a decrease in GDP. Or, if households decided to spend less, it
would lead to a reduction in business production, also causing a decrease in GDP.

GDP is often an indicator of the financial health of an economy. The standard

definition of a recession is two consecutive quarters of declining GDP. When this
happens, governments and central banks adjust fiscal and monetary policy to
boost growth.

Keynesian economics, for example, believes that spending leads to economic

growth, so a central bank might cut interest rates, making money cheaper, so that
individuals will buy more goods, such as houses and cars, increasing overall
spending. As consumer spending increases, companies increase output and hire
more workers to meet the increase in demand. The increase in employed people
means more wages and, therefore, more people spending in the economy, leading
producers to increase output again, continuing the cycle.

Q.2 Explain how an increase in government purchases, result in an income

greater than the initial increase in government purchases?

Ans

Government purchases are expenditures on goods and services by federal, state,

and local governments. The combined total of this spending, excluding transfer
payments and interest on the debt, is a key factor in determining a nation's gross
domestic product (GDP). Transfer payments are expenditures that do not involve
purchases, such as Social Security payments and farm subsidies.
❖ Government purchases include any spending by federal, state, and local
agencies, with the exception of debt and transfer payments such as Social
Security.

❖ Overall, government purchases are a key component of a nation's gross

domestic product (GDP).
❖ According to the Keynesian theory of economics, government purchases
are a tool to boost overall spending and correct a weak economy.

One method of calculating GDP, a measure of the market value of all the final
goods and services produced in a specific time period within a country's borders
that's used to track the health of a nation's economy, is to add up all spending in
four major categories:
❖ Personal consumption
❖ Business investment spending
❖ Government purchases
❖ Net exports
The U.S. Bureau of Economic Analysis (BEA) has a number of sub-categories.
For instance, it breaks down government purchases into federal, state, and local
spending and also differentiates defense-related federal spending from all other
spending. The total for imported goods is subtracted from the final GDP total.

Government purchases range from spending on infrastructure projects and paying

civil service and public service employees, to buying office software and
equipment and maintaining public buildings. Transfer payments, which do not
involve purchases, are not included in this category.

In 2020, the BEA revealed that federal government spending rose, while state and
local government spending fell. Overall, real GDP, in a year overshadowed by
crisis and the economically damaging lockdown measures, was estimated to have
fallen by 3.5%.

Keynesian economics has another important finding. You’ve learned that

Keynesians believe that the level of economic activity is driven, in the short term,
by changes in aggregate expenditure (or aggregate demand). Suppose that the
macro equilibrium in an economy occurs at the potential GDP, so the economy is
operating at full employment. Keynes pointed out that even though the economy
starts at potential GDP, because aggregate demand tends to bounce around, it is
unlikely that the economy will stay at potential. In 2007, U.S. investment
expenditure collapsed with the fall of the housing market. As a result, the U.S.
economy went into the Great Recession. But how much did GDP fall? Suppose
investment fell by $100 billion. You might expect the result would be that GDP
would fall by $100 billion too. If so, you would be wrong. It turns out that
changes in any category of expenditure (Consumption + Investment +
Government Expenditures + Exports-Imports) have a more than proportional
impact on GDP. Or to say it differently, the change in GDP is a multiple of (say 3
times) the change in expenditure. This is the idea behind the multiplier.

The reason is that a change in aggregate expenditures circles through the

economy: households buy from firms, firms pay workers and suppliers, workers
and suppliers buy goods from other firms, those firms pay their workers and
suppliers, and so on. In this way, the original change in aggregate expenditures is
actually spent more than once. This is called the expenditure multiplier effect: an
initial increase in spending, cycles repeatedly through the economy and has a
larger impact than the initial dollar amount spent.

It’s easiest to see how the multiplier works with an increase in expenditure.
Suppose government spontaneously purchase $100 billion worth of goods and
services, perhaps because they feel optimistic about the future. The producers of
those goods and services see an increase in income by that amount. They use that
income to pay their bills, paying wages and salaries to their workers, rent to their
landlords, payments for the raw materials they use. Any income left over is
profit, which becomes income to their stockholders. Each of these economic
agents takes their new income and spend some of it. Those purchases then
become new income to the sellers, who then turn around and spend a portion of
it. That spending becomes someone else’s income. The process continues, though
because economic agents spend only part of their income, the numbers get
smaller in each round. When the dust settles the amount of new income generated
is multiple times the initial increase in spending–hence, the name the spending
multiplier. The table below gives an example of how this could work with an
increase in government spending. Note that the multiplier works the same way in
reverse with a decrease in spending.

Q.3 The quantity of labor demanded is inversely related to the real wage rate.
How would the demand for labor be affected by an increase in productivity of
labor and by an increase in the demand for the output?

Ans

Markets for labor have demand and supply curves, just like markets for goods.
The law of demand applies in labor markets this way: A higher salary or wage—
that is, a higher price in the labor market—leads to a decrease in the quantity of
labor demanded by employers, while a lower salary or wage leads to an increase
in the quantity of labor demanded. The law of supply functions in labor markets,
too: A higher price for labor leads to a higher quantity of labor supplied; a lower
price leads to a lower quantity supplied.

In 2013, about 34,000 registered nurses worked in the Minneapolis-St. Paul

Bloomington, Minnesota-Wisconsin metropolitan area, according to the BLS.
They worked for a variety of employers: hospitals, doctors’ offices, schools,
health clinics, and nursing homes.
The horizontal axis shows the quantity of nurses hired. In this example, labor is
measured by number of workers, but another common way to measure the
quantity of labor is by the number of hours worked. The vertical axis shows the
price for nurses’ labor—that is, how much they are paid. In the real world, this
“price” would be total labor compensation: salary plus benefits. It is not obvious,
but benefits are a significant part (as high as 30 percent) of labor compensation.
In this example, the price of labor is measured by salary on an annual basis,
although in other cases the price of labor could be measured by monthly or
weekly pay, or even the wage paid per hour. As the salary for nurses rises, the
quantity demanded will fall. Some hospitals and nursing homes may cut back on
the number of nurses they hire, or they may lay off some of their existing nurses,
rather than pay them higher salaries. Employers who face higher nurses’ salaries
may also try to replace some nursing functions by investing in physical
equipment, like computer monitoring and diagnostic systems to monitor patients,
or by using lower-paid health care aides to reduce the number of nurses they
need.

As the salary for nurses rises, the quantity supplied will rise. If nurses’ salaries in
Minneapolis-St. Paul-Bloomington are higher than in other cities, more nurses
will move to Minneapolis-St. Paul-Bloomington to find jobs, more people will be
willing to train as nurses, and those currently trained as nurses will be more likely
to pursue nursing as a full-time job. In other words, there will be more nurses
looking for jobs in the area.
At equilibrium, the quantity supplied and the quantity demanded are equal. Thus,
every employer who wants to hire a nurse at this equilibrium wage can find a
willing worker, and every nurse who wants to work at this equilibrium salary can
find a job. The supply curve (S) and demand curve (D) intersect at the
equilibrium point (E). The equilibrium quantity of nurses in the Minneapolis-St.
Paul-Bloomington area is 34,000, and the equilibrium salary is $70,000 per year.
This example simplifies the nursing market by focusing on the “average” nurse.
In reality, of course, the market for nurses is actually made up of many smaller
markets, like markets for nurses with varying degrees of experience and
credentials. Many markets contain closely related products that differ in quality;
for instance, even a simple product like gasoline comes in regular, premium, and
super-premium, each with a different price. Even in such cases, discussing the
average price of gasoline, like the average salary for nurses, can still be useful
because it reflects what is happening in most of the submarkets.

When the price of labor is not at the equilibrium, economic incentives tend to
move salaries toward the equilibrium. For example, if salaries for nurses in
Minneapolis-St. Paul-Bloomington were above the equilibrium at $75,000 per
year, then 38,000 people want to work as nurses, but employers want to hire only
33,000 nurses. At that above-equilibrium salary, excess supply or a surplus result.
In a situation of excess supply in the labor market, with many applicants for
every job opening, employers will have an incentive to offer lower wages than
they otherwise would have. Nurses’ salary will move down toward equilibrium.

In contrast, if the salary is below the equilibrium at, say, $60,000 per year, then a
situation of excess demand or a shortage arises. In this case, employers
encouraged by the relatively lower wage want to hire 40,000 nurses, but only
27,000 individuals want to work as nurses at that salary in Minneapolis-St. Paul
Bloomington. In response to the shortage, some employers will offer higher pay
to attract the nurses. Other employers will have to match the higher pay to keep
their own employees. The higher salaries will encourage more nurses to train or
work in Minneapolis-St. Paul-Bloomington. Again, price and quantity in the
labor market will move toward equilibrium.

The demand curve for labor shows the quantity of labor employers wish to hire at
any given salary or wage rate, under the ceteris paribus assumption. A change in
the wage or salary will result in a change in the quantity demanded of labor. If
the wage rate increases, employers will want to hire fewer employees. The
quantity of labor demanded will decrease, and there will be a movement upward
along the demand curve. If the wages and salaries decrease, employers are more
likely to hire a greater number of workers. The quantity of labor demanded will
increase, resulting in a downward movement along the demand curve.

Shifts in the demand curve for labor occur for many reasons. One key reason is
that the demand for labor is based on the demand for the good or service that is
being produced. For example, the more new automobiles consumers demand, the
greater the number of workers automakers will need to hire. Therefore the
demand for labor is called a “derived demand.” Here are some examples of
derived demand for labor:
❖ The demand for chefs is dependent on the demand for restaurant meals.
❖ The demand for pharmacists is dependent on the demand for prescription
drugs.
❖ The demand for attorneys is dependent on the demand for legal services.

As the demand for the goods and services increases, the demand for labor will
increase, or shift to the right, to meet employers’ production requirements. As the
demand for the goods and services decreases, the demand for labor will decrease,
or shift to the left. Table 2 shows that in addition to the derived demand for labor,
demand can also increase or decrease (shift) in response to several factors.
Factors Results
Demand for When the demand for the good produced (output) increases,

Output both the output price and profitability increase. As a result,

producers demand more labor to ramp up production.
Education and A well-trained and educated workforce causes an increase in
Training the demand for that labor by employers. Increased levels of
productivity within the workforce will cause the demand for
labor to shift to the right. If the workforce is not well-trained
or educated, employers will not hire from within that labor
pool, since they will need to spend a significant amount of
time and money training that workforce. Demand for such
will shift to the left.
Technology Technology changes can act as either substitutes for or
complements to labor. When technology acts as a substitute,
it replaces the need for the number of workers an employer
needs to hire. For example, word processing decreased the
number of typists needed in the workplace. This shifted the
demand curve for typists left. An increase in the availability
of certain technologies may increase the demand for labor.
Technology that acts as a complement to labor will increase
the demand for certain types of labor, resulting in a rightward
shift of the demand curve. For example, the increased use of
word processing and other software has increased the demand
for information technology professionals who can resolve
software and hardware issues related to a firm’s network.
More and better technology will increase demand for skilled
workers who know how to use technology to enhance
workplace productivity. Those workers who do not adapt to
changes in technology will experience a decrease in demand.
Number of An increase in the number of companies producing a given
Companies product will increase the demand for labor resulting in a shift
to the right. A decrease in the number of companies
producing a given product will decrease the demand for labor
resulting in a shift to the left.
Government Complying with government regulations can increase or
Regulations decrease the demand for labor at any given wage. In the
healthcare industry, government rules may require that nurses
be hired to carry out certain medical procedures. This will
increase the demand for nurses. Less-trained healthcare
workers would be prohibited from carrying out these
procedures, and the demand for these workers will shift to the
left.
Price and Labor is not the only input into the production process. For
Availability of example, a salesperson at a call center needs a telephone and a
Other Inputs computer terminal to enter data and record sales. The demand
for salespersons at the call center will increase if the number of
telephones and computer terminals available increases. This
will cause a rightward shift of the demand curve. As the
amount of inputs increases, the demand for labor will increase.
If the terminal or the telephones malfunction, then the demand
for that labor force will decrease. As the quantity of other
inputs decreases, the demand for labor will decrease.
Similarly, if prices of other inputs fall, production will become
more profitable and suppliers will demand more labor to
increase production. The opposite is also true. Higher input
prices lower demand for labor.

Q.4 Critically evaluate the complications in the process of expansion and

contraction of deposits.

Ans

The deposit multiplier is the maximum amount of money that a bank can create
for each unit of money it holds in reserves. The deposit multiplier involves the
percentage of the amount on deposit at the bank that can be loaned. That
percentage normally is determined by the reserve requirement set by the Federal
Reserve.

The deposit multiplier is key to maintaining an economy's basic money supply.

It's a component of the fractional reserve banking system, which is now common
to banks in most nations around the world.
❖ The deposit multiplier is the maximum amount of money a bank can create
in the form of checkable deposits for each unit of money of reserves.
❖ This figure is key to maintaining an economy's basic money supply.
❖ It's a component of the fractional reserve banking system.

❖ Although reserve minimums are set by the Federal Reserve, banks may set
higher ones for themselves.
❖ The deposit multiplier is different from the money multiplier, which reflects
the change in a nation's money supply created by the actual use of a loan.

The deposit multiplier is also called the deposit expansion multiplier or the
simple deposit multiplier. It's connected to the portion of a bank's deposits that
can be lent to borrowers.

This lending activity injects money into the nation's money supply and supports
economic activity. Essentially, the deposit multiplier is an indicator of how banks
can increase, or multiply, deposits.

Central banks, such as the Federal Reserve in the United States, establish
minimum amounts that banks must hold in reserve. These amounts are known as
required reserves. Banks must maintain reserves apart from what they loan to
ensure that they have sufficient cash to meet any withdrawal requests from
depositors.1 The Fed pays banks a small amount of interest on their reserves,
which can be held at the bank or at a local Federal Reserve bank.

The deposit multiplier relates to the percentage of funds in reserve. It provides an

idea of how much money banks could create based on what they have to lend
after accounting for reserves.

The deposit multiplier is the inverse of the percentage of required reserves. So if

the reserve requirement is 20%, the deposit multiplier is 5. Here's how that's
calculated:
 Deposit multiplier = 1/.20
Deposit multiplier = 5

For every $1 a bank has in reserves, it is able to increase deposits (and,

theoretically, the money supply) by $5 through what it lends.

The amount that a bank can lend from its checkable deposits—demand accounts
against which checks, drafts, or other financial instruments can be negotiated—
depends on the Fed's reserve requirement. This is fractional reserve banking at
work. If the reserve requirement is 20%, the bank can lend out 80% of money on
deposit.

The deposit multiplier is frequently confused with the money multiplier.

Although the two terms are closely related, they are distinctly different and not
interchangeable.

The money multiplier reflects the change in a nation's money supply created by
the loan of capital beyond a bank's reserve. It can be seen as the maximum
potential creation of money through the multiplier effect of all bank lending.

The deposit multiplier provides the basis for the money multiplier, but the money
multiplier value is ultimately less. That's because of excess reserves, savings, and
conversions to cash by consumers.

It's a system of banking whereby a portion of all money deposited is held in

reserve to protect the daily activities of banks and ensure that they are able to
meet the withdrawal requests of their customers. The amount not in reserve can
be loaned to borrowers. This continually adds to the nation's money supply and
supports economic activity. The Fed can use fractional reserve banking to affect
the money supply by changing its reserve requirement. The deposit multiplier is
an indicator of how much a bank's lending activity can add to the money supply.
Essentially, banks multiply deposits throughout the country by lending money to
borrowers who then deposit the money in their own bank accounts. The deposit
multiplier represents the amount of money that can be created based on a single
unit held in reserve. The higher the Fed's reserve requirement, the smaller the
deposit multiplier, and the less of an increase in deposits created through lending.

Q.5 Explain why changes in the interest rates a poor indicator of the thrust of
the Federal Reserve’s monetary policy may be?
Ans

Why does the Fed cut interest rates when the economy begins to struggle—or
raise them when the economy is booming? The theory is that by cutting rates,
borrowing costs decrease, and this prompts businesses to take out loans to hire
more people and expand production.

The logic works in reverse when the economy is hot. Here, we take a look at the
impact on various parts of the economy when the Fed changes interest rates, from
lending and borrowing to consumer spending to the stock market.

When interest rates change, there are real-world effects on the ways that
consumers and businesses can access credit to make necessary purchases and
plan their finances. It even affects some life insurance policies.

This article explores how consumers will pay more for the capital required to
make purchases and why businesses will face higher costs tied to expanding their
operations and funding payrolls when the Fed changes the interest rate; however,
the preceding entities are not the only ones that suffer due to higher costs, as this
article explains.
❖ Central banks cut interest rates when the economy slows down in order to
re-invigorate economic activity and growth.
❖ The goal is to reduce the cost of borrowing so that people and companies
are more willing to invest and spend.
❖ Interest rate changes spill over to many facets of the economy, including
mortgage rates and home sales, consumer credit and consumption, and
stock market movements.

Lower interest rates directly impact the bond market, as yields on everything
from U.S. Treasuries to corporate bonds tend to fall, making them less attractive
to new investors. Bond prices move inversely to interest rates, so as interest rates
fall, the price of bonds rises.

Likewise, an increase in interest rates sends the price of bonds lower, negatively
impacting fixed-income investors. As rates rise, people are also less likely to
borrow or re-finance existing debts, since it is more expensive to do so.
A hike in the Fed's rate immediately fuels a jump in the prime rate (referred to by
the Fed as the Bank Prime Loan Rate). The prime rate represents the credit rate
that banks extend to their most credit-worthy customers.

This rate is the one on which other forms of consumer credit are based, as a
higher prime rate means that banks will increase fixed- and variable-rate
borrowing costs when assessing risk on less credit-worthy companies and
consumers.

Working off the prime rate, banks will determine how creditworthy other
individuals are based on their risk profile. Rates will be affected for credit cards
and other loans because both require extensive risk-profiling of consumers
seeking credit to make purchases. Short-term borrowing will have higher rates
than those considered long-term.

Savings

Money market and certificate of deposit (CD) rates increase because of the tickup
of the prime rate. In theory, that should boost savings among consumers and
businesses because they can generate a higher return on their savings.

On the other hand, the effect may be that anyone with a debt burden would
instead seek to pay off their financial obligations to offset the higher variable
rates tied to credit cards, home loans, or other debt instruments.

U.S. National Debt

A hike in interest rates boosts the borrowing costs for the U.S. government,
fueling an increase in the national debt and increasing budget deficits. According
to the Committee for a Responsible Federal Budget, the estimated total budget
deficit from 2022 to 2031 will be $12.7 trillion. Increasing rates by just half a
percentage point would increase the deficit by $1 trillion.1

National debt as a percentage of GDP is expected to be 107.5% in 2031. If rates

were 50 basis points higher, this would increase to 110.6% of GDP.1
Business Profits

When interest rates rise, it's usually good news for banking sector profits since
they can earn more money on the dollars that they loan out. But for the rest of the
global business sector, a rate hike carves into profitability.

That’s because the cost of capital required to expand goes higher. That could be
terrible news for a market that is currently in an earnings recession. Lowering
interest rates should be a boost to many businesses' profits as they can obtain
capital with cheaper financing and make investments in their operations for a
lower cost.

Auto Loan Rates

Auto companies have benefited immensely from the Fed’s zero-interest-rate

policy, but rising benchmark rates will have an incremental impact.

In theory, lower interest rates on auto loans should encourage car purchases, but
these big-ticket items may not be as sensitive as more immediate needs
borrowing on credit cards.

Mortgage Rates

A sign of a rate hike can send home borrowers rushing to close on a deal for a
fixed loan rate on a new home; however, mortgage rates traditionally fluctuate
more in tandem with the yield of domestic 10-year Treasury notes, which are
largely affected by interest rates. Therefore, if interest rates go down, mortgage
rates will also go down. Lower mortgage rates mean it becomes cheaper to buy a
home.

Home Sales

Higher interest rates and higher inflation typically cool demand in the housing
sector. For example, on a 30-year loan at 4.65%, homebuyers can anticipate at
least 60% in interest payments over the duration of their investment.

But if interest rates fall, the same home for the same purchase price will result in
lower monthly payments and less total interest paid over the life of the mortgage.
As mortgage rates fall, the same home becomes more affordable—and so buyers
should be more eager to make purchases.
Consumer Spending

A rise in borrowing costs traditionally weighs on consumer spending. Both

higher credit card rates and higher savings rates due to better bank rates provide
fuel for a downturn in consumer impulse purchasing. When interest rates go
down, consumers can buy on credit at a lower cost. This can be anything from
credit card purchases to appliances purchased on store credit to cars with loans.

Inflation

Inflation is when the general prices of goods and services rise in an economy,
which may be caused by a nation's currency losing value or by an economy
becoming over-heated—i.e. growing so fast that demand for goods is outpacing
supply and driving up prices.

When inflation rises, interest rates are often increased as well, so that the central
bank can keep inflation in check (they tend to target 2% a year of inflation). If,
however, interest rates fall, inflation can begin to accelerate as people buying on
cheap credit can begin bidding up prices once again.

The Stock Market

Although profitability on a broader scale can slip when interest rates rise, an
uptick is typically good for companies that do the bulk of their business in the
United States. That is because local products become more attractive due to the
stronger U.S. dollar.

That rising dollar has a negative effect on companies that do a significant amount
of business on the international markets. As the U.S. dollar rises—bolstered by
higher interest rates—against foreign currencies, companies abroad see their
sales decline in real terms.

Companies like Microsoft, Hershey, Caterpillar, and Johnson & Johnson have all,
at one point, warned about the impact of the rising dollar on their profitability.
Rate hikes tend to be particularly positive for the financial sector. Bank stocks
tend to perform favorably in times of rising hikes.

Although the relationship between interest rates and the stock market is fairly
indirect, the two tend to move in opposite directions; as a general rule of thumb,
borrowing money becomes more expensive. The cost of a house or car will cost
more if the interest rate is higher. This causes consumers to spend less, reducing
the demand for goods and services. When demand decreases, prices decrease too,
which reduces inflation. A nation's central bank controls interest rates. Adjusting
interest rates to spur or slow down the economy is part of monetary policy, which
a central bank is responsible for. Governments are responsible for fiscal policy,
which involves adjusting taxes.

when the Fed cuts interest rates, it causes the stock market to go up and when the
Fed raises interest rates, it causes the stock market as a whole to go down. But
there is no guarantee of how the market will react to any given interest rate
change the Fed chooses to make.

As interest rates increase, the cost of borrowing money becomes more expensive.
This makes buying certain goods and services, such as homes and cars, more
costly. This in turn causes consumers to spend less, which reduces the demand
for goods and services. If the demand for goods and services decreases,
businesses cut back on production, laying off workers, which increases
unemployment. Overall, an increase in interest rates slows down the economy.
Decreases in interest rates have the opposite effect.

Increases in interest rates cause a decrease in inflation. When interest rates

increase, this causes goods and services to become more expensive because