Question

12. If an analyst was considering the effects of interest rates on future direction of the economy, would she focus on the short rates as controlled by the central bank, or long rates as controlled by the market? Why?

Answer 1

The significance of the when deciding which one to focus, either long or short rate. The economy must focus on both rates. The long-term rate may take long for its payback but the rates are usually higher than the short rate, but a short rate gives consumers the ability to buy more. The economy must focus on balancing the two kings of rates.

The lower the interest rate, the more willing people are to borrow money to make big purchases, such as houses or cars. When consumers pay less in interest, this gives them more money to spend, which can create a ripple effect of increased spending throughout the economy and will affect the inflation, thus, it would be better to balance the two.