Making Loan Decisions
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The paper outlines the factors to consider when taking out a large loan and discusses the real interest rate, the inflation rate and factors contributing to this, and the borrower's personal financial history. The paper relates that the Federal Reserve plays an important role in creating monetary policy for the benefit of the public and asserts that the Fed should provide a platform for both public and political participation in its policy-making processes so that their policies would benefit everyone in society, rather than only the very rich. The author of this paper then discusses the factors he would consider before making a decision to take a loan from a financing institution.
From the Paper:"What Woodruff refers to as the "real" interest rate is calculated by subtracting the inflation rate from the interest rate. According to Woodruff, this has remained fairly stable in the United States in history.
"In addition to the real interest rate, it is also important to consider the inflation rate and factors contributing to this, as well as reports used to determine the inflation rate. Leading inflation indicators for example include the Department of Labor employment report, the quarterly worker productivity report, the employment cost index (ECI), and the gross domestic product (GDP). Inflation is measured by means of the consumer price index (CPI) and the producer price index (PPI).
"The consumer price index is the price of goods and services purchased, and is generally considered as the best measure of inflation. Producer price index in turn is the goods and services provided at the wholesale level. This can be used to determine what will occur at the consumer level, and is a good indicator of what I might expect to face in terms of interest rates.
"While GDP also plays a role, it considers output at such a large scale that it is difficult to apply to single cases such as the interest rate. The most important factors to consider are therefore those that most directly influence inflation and by association the interest rate - CPI and PPI."
Sample of Sources Used:
- Amos, O. (n.d.). Borrowing through the financial markets. A Pedestrian's Guide to the Economy. Retrieved May 17, 2010 from: http://www.amosweb.com/pdg/
- Economic Focus: What goes around, The Economist, June 9, 2007. Retrieved May 17, 2010 from: http://proquest.umi.com/pqdweb?did=1284761571&sid=1&Fmt=3&clientId=29440&RQT=309&VName=PQD
- Nasiripour, S. (2010). Federal Reserve's Low Rate Policy is a "dangerous gamble," says top Central Bank Official. The Huffington Post. Retrieved Sept 8. from http://www.huffingtonpost.com/2010/08/13/federal-reserve-pursuing_n_681540.html
- Rittenberg L. and T. Tregarthen (2009). Chapter 24: The Nature and Creation of Money (Sections 1-3) Principles of Economics. FlatworldKnowledge.com. Retrieved May 17, 2010 from: click here
- Rittenberg L. and T. Tregarthen (2009). Chapter 26: Monetary Policy and the Fed (Sections 1-3) Principles of Economics. FlatworldKnowledge.com. Retrieved May 17, 2010 from: click here
Cite this Term Paper:
Making Loan Decisions (2013, April 28) Retrieved July 14, 2020, from https://www.academon.com/term-paper/making-loan-decisions-152762/
"Making Loan Decisions" 28 April 2013. Web. 14 July. 2020. <https://www.academon.com/term-paper/making-loan-decisions-152762/>