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

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.

Behavioral Economics Concepts

Review your Week 1 Learning Activities, especially the Investopedia Resources on Behavioral Finance: Anchoring, Mental Accounting, Herd Behavior, and Prospect Theory located in the “Additional Reading and Video Resources” link on your course page.

Choose two of the following concepts discussed in this week’s materials.

· Anchoring

· Mental accounting

· Herd behavior

· Prospect theory

Define each in your own words and explain how each could apply to your personal financial and credit decisions. Your entire response should be at least 100 words.