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In analyzing the influence of the actions of the Federal Reserve on investors, the current influence of the decrease in consumers’ confidence on investors and the reason for investors’ nervousness should be explained. Such explanation might be appropriate when related to the theory of aggregate supply and demand. The decrease in consumers’ confidence implies that consumers perceive the situation with the economy to be less stable and thus, they make fewer purchases preferring to save the money.
The latter implies a decrease in the money’s demand. In money-market equilibrium, such information can be represented as the relationship between interest rates, the quantity of demanded money, and the fixed money supply represented through the Federal Reserve’s monetary policy. A decrease in the demand is a shift to the right in such equilibrium which accordingly leads to a decrease in interest rates. Such interest rates can be seen as the root cause of investor’s nervousness in the case, see Fig 1.
The decrease of interest rates will lead to an increase in bonds with an increase their price is an area of concern to investors who are afraid that the interest rates will not be able to keep up with the inflation, considering that GDP is slowing down.
The way the Federal Reserve will react is through increasing the consumers’ confidence through buying the bonds from the consumers. Buying the bonds will increase the supply of money, and shift the aggregate demand to the right. The influence of the latter on the investors in the bank can be seen through decreasing the loaning rates, for which the consumers will more likely borrow money from the bank.
Similarly, businesses will restore confidence borrowing money and making investments which increase their profitability. Such profitability will be refl3ected through higher stock prices, which for certain consumers of the bank will be a favourable aspect stimulating their spending.
Customers who have pensions and/or retirement plan might be influence through the response of the Federal Reserve through the way buying bonds will influence the GDP and the price level. In that regard, with a healthy economic environment, the pensions of the customers will give them the opportunity to spend have more confidence, increasing the aggregate demand for money.
Thus, in general the main aim of the actions of the Federal Reserve is restoring the confidence of the consumer, and making them spend more. The ultimate goal is to restore the confidence of the consumers to the level when the equilibrium in the market automatically adjusts the economy through self-correcting mechanisms.
In that regard, the slowing down of GDP growth, and the decline in consumer confidence were aspects that demonstrated the failures in such self-correcting mechanisms for which intervention was required. The bank focuses on consumers and lending in which the cycle of the money is based on their outlook for the economy. In the interrelation between the determinants of the equilibrium implies that changes in demand have more profound impact on the economy, with consumers’ fears and the actions that follow causing those fears to come true.
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