Question

Discus why Interest rate is viewed as a key barometer as well as an “adjustable knob” in the financial world, where the variable is a key indicator but also a parameter that may be regulated to attain the desired economic effects.

Answer 1

The Federal Reserve's Control over money and interest rates for influencing the overall economy. To prevent inflation it raises the interest rates and decreases the money supply. When banks raises their rates, fewer people will borrow money as it costs more to do so while that money accrues at a higher interest. Thus the spending falls, prices decreases and inflation slows. Change of an interest rate is viewed as a key barometer as well as an "adjustable knob" because it has it's impact on aggregate expenditure, which in turn impact the GDP of nation, thus achieving the macro economic goal. The goals of monetary policy are to promote maximum employment, stable prices and moderate long-term interest rates. By implementing effective monetary policy, the Fed can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment