. When the economy is in a recession, the Federal Reserve usually cuts interest rates. Why would the federal government do this?

Economics Concepts
Review your Week 1 Learning Activities, especially Ch. 1 of Focus on Personal Finance,
Khan Academy Resources and Video Reflection, and
Investopedia Resources located in the “Additional Reading and Video Resources” link on your course page.

Respond to each of the following questions in your own words. Each response should be at least 50 words.
1. A nominal interest rate is defined as “the opportunity cost of holding or using money.” Explain what you understand this definition to mean.
2. When the economy is in a recession, the Federal Reserve usually cuts interest rates. Why would the federal government do this?
3. How does your saving and spending profile change depending on the state of the economy, i.e., whether the economy is in a recession versus expansion? Do interest rates play a role in your decisions? Why or why not?
4. If interest rates are at a level of 1% and expected inflation is 2%, would you prefer saving or spending your money? Justify your answer.


 

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