Introduction to Finance

DISCUSSION QUESTION 2
How will the U.S. government be able to repay the amount of national debt that is currently 
outstanding?
LEARNING ACTIVITY
Go to the U.S. Treasury’s Bureau of Fiscal Service website at http://www.treasurydirect.
gov/. Go to “Reports” and then to “Historical Debt Outstanding.” Find information on 
the changing size of the national debt during the past fi ve years. Write a brief summary 
of what has happened.
How Does the Fed Aff ect Me?
Suppose you hear on the radio that the Fed has moved to cut 
interest rates. Such a rate cut does not aff ect just banks or large 
corporate borrowers; it can have an impact on individuals, too. So 
how might a rate cut aff ect you?
If you have savings at a depository institution, the eff ect may 
be negative. Attempts to lower interest rates in the economy may 
lead to lower interest rates on your checking account, your savings 
account, or the next CD you invest in.
Of course, there is a potential benefi t on the borrowing side. 
An attempt to lower rates can lead to lower loan rates for a car 
loan, student loan, home equity loan, or a home mortgage. If 
someone has a variable or adjustable rate mortgage, his or her 
interest payments may fall as rates decline. Some interest rates 
on credit card balances are linked to a market interest rate, so as 
market interest rates fall, the interest rates on credit card balances 
will fall, too.
Lower interest rates can help investors in stocks and bonds, 
too. As we will see in Chapter 10, an economic environment 
with lower interest rates can lead to increases in stock and bond 
prices, thus increasing the value of an investor’s stock and bond 
holdings.
Personal Financial Planning

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5.6 Changing the Money Supply