Unit 1

Professor: Christen Enos

Pedro Aristeguieta
Interest Rates: The Perfect Timing

Since High School I have been fascinated by the importance of the

economy. The independence of the United States, WWI, WWII, the collapse of
the Soviet Union, and almost all major historical events have an economic
reason. By studying the economy in deep we can understand many historical
events that have dramatically changed the world. Nowadays world economy
is more interrelated than ever before, and countries especially economic
powers need to be aware that economic adjustments have domestic and
international repercussions. Currently, the United States is in an economic
dilemma of whether interest rates should be raised or not interest rates are
virtually 0%. This decision will definitely change the world economy and the
Fed American Central Bank knows that well. It will be interesting to follow
this debate and eventually see how the Feds decision on raising interest, or
not, will affect the world economy.
United States is the world economic power and no one can deny that.
The eventual interest raise will have enormous consequences in domestic
and international markets, this is why the American dilemma has become a
worldwide trending topic among economists. Interest rates represent the
cost of borrowing; when the Fed raise interest rates to other banks, gradually
the cost of debt increases for every institution, corporation and citizen of the

country. This happens because as the Fed raise interests, it is more

expensive for banks to borrow money from the Fed, which is a basic daily
need in the banking system. As it is more expensive for banks to borrow
money, they need to raise interest to their clients to maintain their
profitability rates. And as interest are higher for clients regular citizens,
banks and institutions every member of the economy gets affected by the
Fed's decision.
The Fed manipulates interest rates to use them in their favor to model
the economy for specific goals. For example, when the economy is growing
slow, central banks, or the Fed in the US case, lower the interest rates so
that the cost of debt decreases and incentives for spending increase across
the country. On the other hand when the economy is growing very fast and
unemployment is low, there is an economic pressure on wages and regularly
salaries go up. As employees earn more, they buy more products and
because the demand increases over products, prices increase and therefore
there is more inflation in the economy. In order to stop inflation, which is the
main problem of nations' rapid growth, central banks raise interests, and this
encourages corporations, citizens and institutions to save more and decrease
spending, which should eventually decrease inflation.
The explanation I provided is just a general overview of the impact of
interest rates. Adjustments on the interest rates have hundreds of other
consequences domestically and abroad. This is the reason why the Fed has

taken so long to raise the interest rates. Fed board members are aware that
if they do not do it in the precise moment, the raise could be catastrophic for
the world economy. The current interest rates dilemma is a very interesting
topic and I would love to write about it for several reasons. First of all, the
impact on an eventual interest raise is a doubt, no one can say exactly what
will happen and I enjoy reading different economists' opinions on this debate,
each of them have their own hypothesis. Also, an eventual interest rate rise
in the US will have tremendous impact on other nations' economies, which is
making them adapt to the Fed's different decision scenarios. Developing
countries are the ones that will suffer the most consequences. As US plans to
raise interest rates, many capital from these developing nations is being
taken out from their countries' currency to buy US dollars and hold American
currency until the eventual interest raise. Once the Fed would raise interests,
investors would allocate their capital to receive more interest payments at
the same level of risk. I would like to know in detail how nations are
preparing for this eventual event and how they will be affected. Another
aspect, and the one I consider the most important one, that makes me very
excited about writing over this debate is the fact I do not know enough on
this topic to have an opinion. By researching and writing about it, I expect to
learn in detail more on this topic, and as I get to know more over this debate
I am sure I will be able to have my own opinion on this fascinating issue.
In order to analyze in deep this dilemma that the US is going through
there has to be thoughtful research on the topic. There are many academic

journals that explain almost everything we want to know about interest

rates. I found one particularly interesting published in 2000, by Peter N.
Ireland called Interest Rates, Inflation, and Federal Reserve Policy Since
1980. Even though the article might be old published fifteen years ago, the
economic principles that Ireland describes still the same in today's world. In
his journal, Ireland basically demonstrate the correlation between interest
rates and inflation and how the Fed has learned how to control inflation over
the last years. For the current debate on interest rates most economists in
favor of rising interests mention the risks of inflation if the Fed does not raise
interest rates soon. Interestingly, on the other side, those who oppose the
raise say that if the Fed finally decides to do the increment to the interests,
there will be deflation in the economy. Deflation is when prices decrease over
time, and almost all economists of the world agree that is absolutely
devastating for an economy. Ireland covers in his article the relation between
interest rates and inflation, which is exactly what the main topic of the
debate is about.
Irelands journal is very interesting but it has to be read with attention.
Ireland uses a very technical language that I am sure is understood only by
very well-educated economists. I have to admit that even though I am an
economics major, I did not understand all the technical parts of Irelands
journal. Ireland clarifies his formulas, which are used several times, with
written parts and that makes it easier to follow the main idea, but the
technical formulas are very complex. Ireland communicates his ideas by

providing short summaries of what happens, when interest rates are

changed, to every member producers and consumers of the economy.
Then he analyzes if there is a coherent correlation between interest rates
and the prices of products. After all the research, Ireland concludes that
there is a strong correlation between interest rates and inflation. And
according to Ireland, the Fed has been able to control inflation very well in
the late nineties because of their knowledge on interest rates modeling. It
was very interesting to find out that the inflation rate in the US in the 1980s
got to be almost 15%. This would be almost impossible to happen in today's
economy since the Fed would adjust interest rates at their convenience to
avoid this scenario.
The interest rates debate has involved many smart economists into the
discussion. But not all economists have the same opinion. Many academic
journals, such as Ireland's can tell us what the Fed should do depending on
the current inflation levels, but the world has changed and the Fed does not
only need to look at this index when taking the decision. The uncertainty and
the lack of a final call from the Fed fascinates me. I am very excited on
following this topic in deep. Especially I am excited of analyzing this topic
specifically in this class because besides the facts that I mention before; that
I will be learning and having my opinion on interest rates. By choosing this
topic I am confident that I will improve my personal writing since I have to
convert technical communication into a friendlier style.

SOURCES:
Interest Rates, Inflation, and Federal Reserve Policy Since 1980
Peter N. Ireland
Journal of Money, Credit and Banking
Vol. 32, No. 3, Part 1 (Aug., 2000) , pp. 417-434
Published by: Ohio State University Press
Stable URL: http://www.jstor.org/stable/2601173
The Feds Plan to Hike Interest Rates. The Economist. The Economist
Newspaper, 31 Aug. 2015. Web. 21 Sept. 2015.

Reflective & Response Letter Unit 1

I really enjoyed doing the first unit for the first online class I have taken
in my life for several reasons. First of all I liked how before submitting the
final draft we received feedback not only from the professor but also from
our classmates. Obviously, because of the experience and knowledge
acquired through years, professors provide great feedback for essay reviews.
However, students revising other classmates' paper can provide a different

approach that is harder for professors to do. Students know exactly in what
other classmates are struggling as they went through the same process to do
the assignment. This makes student feedback very precise and extremely
helpful. Also, the audience for this first assignment are other students. There
is nothing better than receiving feedback from the same audience you will
address in the future.
Being that said I would like to thank my classmates Saskia Vasilef and
Maram Alattas for their very helpful and thoughtful feedback. From Saskia I
realized that I was having grammar mistakes, I tried to fix them all for the
final draft. Also she explained me why I needed to cover in more detail what
would be the impact of an eventual interest raise for specifics industries. For
my final draft I included a paragraph covering why every industry,
corporation and citizen would be affected with the eventual interest raise.
From Mara's feedback I realized that that not all students are economics
major, therefore I need to clarify some definitions and principles that I was
taking from granted that all knew. Also, I really appreciate her comments on
the academic essay I incorporated to my paper. She explained me and
convinced me that I had to create a connection between the essay
incorporated and the current debate I was covering. The only thing I did not
follow from Mara's recommendations was changing the essay incorporated,
which was published in 2000, for a more recent one. After asking professor
Enos and analyzing it in detail I am convinced that even though is old, the
economic principles from 2000 and today are the same. Despite I did not

agree with Mara on this, I appreciate her comment since it made me realize
how powerful and convincing was the essay incorporated to my paper.
Professor's feedback was essential to have what I believe it is a final
strong and convincing essay. I really appreciate professor's feedback for our
drafts, it really helped a lot, in each of the points she mentioned I learned
something new to improve for my essay. There were some basic
recommendations that made me edit my essay immediately, such as the fact
that articles titles should be in quotes, and journal titles italicized. Another
simple recommendation that clarified a lot to me was avoiding casual 1st
person tone since it does not sound completely convincing. And the last
simple recommendation that made me change my essay was reading the
essay out loud. By doing so I realized how I was missing some commas.
Regarding the academic essay incorporated to our papers I found particularly
helpful the difference the professor mentioned of summary versus analysis. I
realized that I was lacking analysis on my paper. My first draft had much
summary but not much analysis, for my final draft I tried to be more analytic.
I did not only learned of interest rates by doing this paper but I am
confident that I improved my writing. The hardest part of this essay was
maintaining it short. When I started for the first time writing on the topic I
realized that I had more than 1800 words, which was way too much. I had to
be more direct and precise and avoid unnecessary information in order to get
close to 1000 words. Also, I learned how to analyze an academic essay and
translate it into a more friendly tone for fellow classmates. It was not easy

but I am happy to read my final draft now and see how I managed to convert
those complex definitions into a completely new tone.