which point demonstrates the effects on investment of (a) an interest rate cut? course hero

How do interest rate fluctuations affect your investments?

Because interest rate fluctuations can affect investments in different ways, there is no single action you should take when they change. Stay focused on your financial goals, stick to your plan, and work with your financial professional to construct a portfolio that is diversified enough to help weather any short-term effects of a rate change.

Will the Fed's recent interest rate cuts affect stocks?

While the recent interest rate cuts are meant to support and stimulate current economic activity, it’s possible these effects could have an impact on stocks, bonds and other investments. The Federal Reserve (Fed) has a dual mandate: to promote maximum employment and price stability.

What happens when interest rates are lowered?

In summary, when interest rates are lowered: 1 Bond prices rise 2 Potential stock market gains 3 Lower interest rates on savings accounts and CDs 4 Commodity prices rise 5 Mortgage rates fall

How does the Federal Reserve change interest rates affect your portfolio?

When the Federal Reserve changes interest rates, it can affect your portfolio. Interest rate fluctuations can send ripple effects throughout the economy. While the recent interest rate cuts are meant to support and stimulate current economic activity, it’s possible these effects could have an impact on stocks, bonds and other investments.

How does a rate cut help consumers?

A rate cut could help consumers save money by reducing interest payments on certain types of financing that are linked to prime or other rates, which tend to move in tandem with the Fed's target rate.

How do interest rate changes affect consumers?

But what about ordinary households? Interest rate changes also have large impacts on consumer behavior and the level of consumption an economy can expect. This is because higher rates translate to larger borrowing and financing costs for things purchased on credit. Read on to find out exactly where this comes into play.

How does changing the federal funds rate affect the money supply?

Changing the federal funds rate influences the money supply, beginning with banks and eventually trickling down to consumers. The Fed lowers interest rates in order to stimulate economic growth. Lower financing costs can encourage borrowing and investing.

Why does the Fed lower interest rates?

The Fed lowers interest rates in order to stimulate economic growth. Lower financing costs can encourage borrowing and investing. However, when rates are too low, they can spur excessive growth and perhaps inflation. Inflation eats away at purchasing power and could undermine the sustainability of the desired economic expansion.

How does interest rate affect consumer behavior?

When rates go down, borrowing becomes cheaper, making large purchases on credit more affordable , such as home mortgages, auto loans, and credit card expenses.

What is the target rate?

The target rate is a guideline for the actual rate that banks charge each other on overnight reserve loans. Rates on interbank loans are negotiated by the individual banks and, usually, stay close to the target rate. The target rate may also be referred to as the "federal funds rate" or the "nominal rate.".

What is the Federal Funds Rate?

The federal funds rate is a monetary policy tool used to achieve the Fed's goals of price stability (low inflation) and sustainable economic growth. Changing the federal funds rate influences the money supply, beginning with banks and eventually trickling down to consumers.

What happens if the government reduces its deficit to zero?

If the government reduces the size of its deficit to zero, there will be (A) in the (B) of loanable funds. Reducing deficits to zero will cause interest rates to (C). At any given interest rate, if consumers decide to save more, and the government budget remains unchanged, there will be (D) in the (E) of loanable funds.

Which direction does supply shift for loanable funds?

supply for loanable funds shifts to the right.

How to find net capital inflow?

Assume a hypothetical economy that is open to capital inflows and outflows, so that net capital inflow equals imports (IM) minus exports (X).

Is the interest rate higher or lower?

the interest rate is higher rather than lower.