Money demand/supply

Money demand/supply
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Abstract
The federal government is posing increased interest rates on the auto sales. This means that the market and the economy are significantly going to be affected. With an increase of 0.33 percent increase in 2018 as compared to 2017, there likelihood of increased rates. The paper explores various ways in which this step by the federal government is likely to affect the economy. The customers are currently forced to take long-term loans to cope with these changes. It is necessary to note that all these steps play a significant role in economic operations more so regarding the interest rates both short and long terms. The study gives a better insight on how the money demand and money supply is likely to be affected by an increase in the interest rate. However, it is worth noting that an increased interest rate reduces the quantity of money that circulates in the economy.
Introduction
On 22nd February 2018, Forbes magazine published that the increasing interest rates are going to affect 2018 auto sales negatively. Through what it described as a headwind for the auto sales in 2018, the rising interest rates turn out to be a mild concern for the auto sales.
Summary of the article
The federal government is increasing the interest rates, and this is significantly affecting the auto sales this year in 2018.The article indicates that payments are rising and thus hurting the demand for non-luxury commodities at the margin.

Through this, the borrowers who have lower credit scores are affected by the higher rates which they are charged. According to Jonathan the chief economist of the Cox Automotive, the interest rates charged on the auto loans have increased by about 0.3% points compared to the year 2017 (Henry, 2018).The customers are however offsetting the higher rates by taking more extended loans. In minutes published by the Federal Open Market Committee, Fed had avoided raising the federal funds rate. Even with the expectations of having a gradual increase in the federal funds rate, they are likely to remain below the expected levels a bit longer (Henry, 2018).
According to the analysts, many customers are opting for longer-term loans which they end up paying higher interests over the life of the loan with the primary motive of holding the monthly payments. In 2016, the interest rate was at 4.14 percent which increased to 4.33 percent for the year 2017.Due to the high-interest rates, many customers are not opting for the 60-month rate but preferably for 72 months at 43.2 percent. Those who follow are for the 73 to 84 months who are at 30.5 % (Henry, 2018).
Discussion
An increased interest rate means that there will be less money supply in the market. Increased interest rates charged on the auto sales imply that customers are the ones to bear the costs of buying cars at higher prices. Even with an increase in revenue to the government and improved economy, the demand for the cars is likely to reduce due to the higher interest rates charged.
The highlighted target federal funds rate is higher than the capability of the customers. The result will, therefore, be customers opting for long-term loans. Even if they will pay with higher interest rates, the amount of revenue earned by the federal government is likely to reduce in the short run.
Graphical analysis for auto sales
D1S2S1
4.33
Interest rate (%)
4.14

50100
Quantity of money (per annum)

The money supply curve shifts from S1 to S2 due to increased interest rates charged on the automobiles from 4.14 to 4.33 percent. According to the graph, the quantity of money reduces from 100 to 50 per year. Increased interest rates charged by the Federal government discourage customers and automotive companies to acquire loans and thus leading to the reduction in the quantity of money demanded in money demand curve. When there is no change in the interest rate, the amount of money demanded and the amount supplied remains at equilibrium.
Consequences
When the federal government increases the interest rates, more manufacturers of automobiles are likely to be discouraged from operating. The short-term interest rates may not have more significant effects on automobile manufacturers since many customers are not for the short-term loans. The long-term interest rates, on the other hand, affect their operations since the customers are forced to pay for more interests when paying for their loans. The primary factor that may cause a different outcome is the exit of the automobile manufacturers from the market. This will force the interest rates to be reduced to allow them to operate. Customers who want to purchase cars are the ones who are likely to be hurt by this decision since they will have to incur higher interest rates when paying for their car loans. Car manufacturers are also expected to be affected as they are likely to be forced to increase the prices of their products to meet the increased interest rates needed.
References
Henry, J. (2018, February 22). Rising Interest Rates Are A Headwind for 2018 Auto Sales. Forbes Magazine. Page 1-2. Retrieved from: https://www.forbes.com/sites/jimhenry/2018/02/22/rising-interest-rates-are-a-headwind-for-2018-auto-sales/2/#2c0fe27a3fd6