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FIN 402 - Week 3 - DQ 2

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What is the relationship between inflation and interest rates? How does this relationship
affect asset prices? How does the unemployment rate affect interest rates?
The relationship between inflation and interest rates is that interest rates will be used to
control the inflation rate. It is a constant balancing act on the Federal Reserve to set interest
rates at a level that will help to curb the inflation. Inflation will play a large role in
investments as people will need to factor inflation in the anticipated or expected returns of
their borrowing rates. High interest rates will ultimately cause less borrowing and higher
savings by individuals. Conversely lower interest rates will theoretically increase borrowing
and decrease the savings rates.
This relationship will affect asset prices as the inflation rate rises, the asset price will increase
as well. As potential borrowers look at lower interest rates the demand for assets will increase
thus increasing the asset price. As higher interest rates detract potential borrowing, the
demand for assets decrease and thus the asset will decrease.
Unemployment will affect interest rate by determining if companies are going to be hiring or
not. If the interest rates for borrowing are high, this will discourage businesses from
borrowing funds and thus discourage growth. If there is no growth, typically the company
will not be in a position to hire additional employees to continue. The only logical reason for
hiring without growth would be either employees left the company for another employer and
need to be replaced, or they were fired and thus they would increase the unemployment rate.

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What is the relationship between inflation and interest rates? How does this relationship affect asset prices? How does the unemployment rate affect interest rates?? The relationship between inflation and interest rates is that interest rates will be used to control the inflation rate. It is a const ...
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