1 Write in deept on the possibility of interest rate hike ov

1. Write in deept on the possibility of interest rate hike over the coming year. What do you believe are the reasons for this occurrence?

2. Comment on the solvency of social security

Solution

During the recessionary period experienced by US, the Fed lowered the interest rate to near-zero. During recession, lowering of interest rates signify that borrowing and investment become cheaper. So, consumption increases and investment boosts up, stimulating aggregate demand, boosting the economy to pull it out of recession, resulting in higher output, higher demand for labor, lower unemployment and eventually a price rise (inflation).

But now the Fed and economic think-tanks have evaluated that US economy has come out of the recssion. The unemployment rate is at all-time low in last 5 years and inflation is going to hit 2% soon, signlalling that the economy is in the track of growth once again. Fed believes that if this economic condition and preconditions continue, the economy may become overheated soon, by causing aggregate demand rise faster than aggregate supply, which will further result in an upward spiral of inflation. So, this is the time to intervene in the economy in the form of contractionary monetary policy by hiking rates which will tigten the money supply in the economy and will ease the pressure on price level and overheating.

Note: Out of 2 questions, the first is answered.