Federal Interest Rate and General Reserves revision

Federal Interest Rate and General Reserves

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Federal Interest Rate and General Reserves

During the establishment of Federal Reserve the country take into consideration of the current condition of the economy before establishing the interest rate of the country. During the period when the economy of the country is slow there are low interest rates which are affixed to the economy of the country with general purpose of rebuilding the entire economy of the country. During the period when the economy is considered to grow and increase in general performance the consumers intends to embrace the system of maximum employment and thorough saving as there is general increase of general purchasing power. At this point the Federal Reserve will tend to increase the overall interest rate as there is general decrease on the demand for funds from national reservoirs (United States & United States, 2003).

Before taking measures to increase the overall interest rate on an economy, the management of the country will take in thorough consideration of overall interest rate in reference to rate of inflation and the value of dollars in the international market with more regards to international forces. It should be noted that inflation rates are bound to affect the overall interest rates of the country in considerations to rate fixed on long-term and short-term loans by individual citizens. In most economic development the effects of inflation will tend to push the rates of interest rates to higher levels with consequential decline during deflation. Therefore, before determining the required rates of interest rate any particular country should take into consideration on overall effects to foreign and domestic investors involved in running the sector. In an economy which is supplemented by domestic sources of funds the interest rates are considered to be lower to encourage investment in the current marketplace (Brock et.al 2000).

The comparative advantages are considered to be the major economic policies that are practiced in particular country in order to supplement economic development and growth. They are considered as the major contributors to development of free trade that deals in areas of production and making production affordable at cheaper cost, faster and in better mechanisms compared to other trading partners in the market. However, the primary fear of exercising and practicing free trade is that they will be out produced by their other countries in several sectors of growing the economy of the country. The areas include the sectors of imports and exports due to absolute advantage exercised by major countries of the world (Brock et.al 2000).

Comparative advantage stipulates that each and every country should exercise certain class of production that will be involved in both export and import. Therefore, the welfare of the country have improved as there is total economic welfare in the country as industries are able to focus on where they are more experienced and successful compared to areas they have low production and opportunity cost. In America they have comparative advantage when it comes to capital goods which makes them more economically active compared to other trading partners (United States & United States, 2003).

References

Brock, P. L., Rojas-Suárez, L., & Inter-American Development Bank. (2000). Why so high?: Understanding interest rate spreads in Latin America. Washington, DC: Inter-American Development Bank.

United States, & United States. (2003). Interest rate statistics. Washington, D.C.: U.S. Dept. of the Treasury.