Affiliated School
Why do you think auto sales generally peak well before a recession, then recover near the end of a recession? How might auto sales relate to monetary policy and interest rates?
Generally before a recession the economy is usually doing very well. This means that the consumers have enough money to purchase consumer durables. It is a period when the employment rate is high and this means people can easily afford to be extravagant. However, when the recession kicks in and unemployment increases, aggregate demand decreases and the sales automatically decrease (O’Sullivan, 2003). During a recession aggregate supply decreases as well due to lack of enough resources to cater for the prior production capacity.
Monetary policy regulates the quantity of money that the people have through various tools and interest rate is one of the tools used. This is because during a recession, people hardly have any money and demand decreases, reducing sales as well (O’Sullivan, 2003). When interest rates are lowered by the federal bank, people can easily get loans for investment and other purposes and this increases aggregate demand and sales will increase. But when there are high inflationary rates interest rates can be increased and reduce the amount of money circulating in the economy and it affects sales as well.
Explain why the results of Consumer Confidence and Consumer Expectations surveys are leading indicators.
Consumer confidence is the level of optimism that consumers have towards the economy and future expectations, it is expressed through their behaviours in terms of spending and savings (Zdravka, 2010). Basically it is a measure of the consumption component of the GDP. It can be used to tell how willing consumers are to spend and if there will be an expected increase or decrease in aggregate demand.
Consumer expectations survey basically shows the consumers look at the economy and what he/she expects about the future of the economy. This is because consumers will always want to be ahead of the economy (Zdravka, 2010). This is if there is a consumer expectation of inflation aggregate consumption will decrease while a deflation expectation will decrease consumption. This means when they are used as indicators producers can be able to tell when the right time for production is and when it is not.
References
O’Sullivan, Arthur, Steven M. Sheffrin, (2003), Economic Principles in Action; Effects of Monetary Policy, Pearson Prentice Hall, New Jersey.
Zdravka Bosanac,(2010), Consumer Indexing; Administrative Information About the Statistical World, New York
