paper 1 rewriting (1050 words excluding reference)

When making a large or small purchase, a consumer must be wary of the current economic conditions as well as their wants, needs, and budget abilities. Christine is a consumer who is looking to purchase a vehicle with a short-term auto loan from her lender. Christine has taken into consideration the current interest rates, as well as the inflation rates.

Christine’s Car Purchase

Purchasing a new car is a considerable investment, and a decision not to take lightly. In 2015, Christine was on the market for a new Subaru Legacy. A necessary purchase for commuting to work a total of twenty-four thousand miles per year.

The major contributing factors that Christine is taking into account when making her decision are price, miles per gallon, safety, reliability, and resale value. In 2015 a brand new a 2015 Subaru Legacy had a starting price of twenty-two thousand dollars and a top end price of thirty thousand dollars. Christine chose to purchase a 2015 Subaru Legacy Premium package for twenty-five thousand five hundred and eighty dollars after purchase price, tax title and fees. The purchase price was in line with Christine’s budget, and the interest rates were currently very low. In 2015, the interest rates that were available to Christine to purchase a new car were 2.4% for 48 months leaving her with a manageable monthly payment. In 2015 Christine was employed at the same employer for more than ten years and considered the 48-month payment schedule the most beneficial. Christine thought that drawing out the payments in a more extended contract would only increase the amount of money she pa Interest rates in 2015 were meager overall but currently on the rise. In 1988 the interest rates were near ten percent, and in 2015 at the time of Christine’s purchase, the interest rates were less than one percent. Just a year later the interest rates were four times higher than when Christine made her purchase. id in interest over time, so she chose to spend a little more per month to pay less over time.

Real Gross Domestic Product (Real GDP)

Real Gross Domestic Product, or real GDP, measures the value of final goods and services produced within the borders of a country during a specific time frame, usually over the course of a year (McConnell, Brue, & Flynn, 2014, p. 531). The real gross domestic product measurement is useful because it reveals whether or not a country’s economic output is growing (McConnell, Brue, & Flynn, 2014, p. 531).

Real Personal Consumption Expenditures (PCE)

Real Personal Consumption Expenditures, or PCE, is a measure of price changes in consumer goods and services ("Investopedia," 2018). Many analysts prefer to use the consumer price index over the personal consumption expenditures (PCE) due to the consumer price index’s ability to determine economic stability using the fixed basket of goods ("Investopedia," 2018). What the personal consumption expenditures is best used for is revealing personal spending habits ("Investopedia," 2018). When gauging the inflation, the Federal Reserve prefers to the Personal Consumption Expenditures (PCE) because it is comprised of a broad range of expenditures ("Investopedia," 2018). The personal consumption expenditures (PCE) is comprised of two categories, goods and services ("Investopedia," 2018). Goods are then further broken down into two subcategories, durables, and non-durables ("Investopedia," 2018). Durable goods are those that last in a home for longer than three years, for example, microwaves, automobiles, and furniture ("Investopedia," 2018). Typically a durable item is a more expensive item than a non-durable item ("Investopedia," 2018). Non-Durable items are items that last less than three years such as household cleaning supplies, clothes, and consumables ("Investopedia," 2018).

Trends in GDP and PCE

Trends in the Gross Domestic Product and the trends in the personal consumption expenditures are very similar to each other. In 2008 they started to downslope until 2009 when they both started climbing. In 2015, when Christine made her car purchase the gross domestic product, and personal consumption expenditures were on the rise and not slowing down.

Effective Federal Funds Rate

The effective federal funds rate is the rate at which depository institutions lend reserve balances to other banks on an overnight basis ("Investopedia," 2018). The depository institutions loan the money to other banks who in turn lend the money to consumers. Considered one of the most important interest rates in the United States, the federal funds rate affects monetary and financial conditions, which in turn have a bearing on critical aspects of the broad economy including employment growth and inflation ("Investopedia," 2018). Short-term interest rates are also indirectly influenced by the federal funds rate. Lenders usually set their lending rate for all loans at a standard or prime lending rate, so a long-term loan and a short-term loan are equally affected ("Investopedia," 2018).

Consumer Price Index (CPI)

The consumer price index is an index that the government uses to report the inflation rates each month and each year (McConnell, Brue, & Flynn, 2014, p. 591). Compiled by the BLS, the consumer price index is a record of the rise in prices of market-based items (McConnell, Brue, & Flynn, 2014, p. 591). The government also uses the consumer price index to adjust social security benefits and income tax brackets for inflation (McConnell, Brue, & Flynn, 2014, p. 591).

Effective Federal Funds Rate and Consumer Price Index Trends

The consumer price index and the effective federal funds rate do not reflect the same when reviewed on a graph. The effective federal funds rate starts out very high and fluctuates and generally goes lower as time progresses; whereas the consumer price index starts low and continually rises over time. When the federal funds rate is at its highest margin, the consumer price index is at its lowest over a thirty-year span.

Tax Credits Influential

In 2015 the State of Minnesota was offering a tax break for new vehicles purchased with zero or partial-zero emissions. The car that Christine bought was a partial-zero-emissions vehicle, so Christine was therefore allowed to deduct a small amount from her taxes. This bonus factored heavily into her decision on which package to purchase for the vehicle, but not her overall choice to buy a new car.

Economy’s Influence

The economy influenced Christine’s car purchase because she was watching the interest rates rise over the past few weeks. The economy also affected Christine’s purchase because of inflation rates. Christine’s salary was in line with the current inflation rates. She was able to purchase because her salary was enough.

Conclusion

Christine has decided to make a large purchase that requires taking out a small-term personal loan. Christine has taken into consideration the consumer price index, which reports inflation, federal funds rate which influences the short-term loan interest rates, and her budget. She has considered all factors and has chosen to move forward with her purchase of a 2015 Subaru Legacy.

References

Federal Reserve Bank of St. Louis (2018). Retrieved https://fred.stlouisfed.org/series/CPILFESL

Federal Reserve Bank of St. Louis (2018). Retrieved from https://fred.stlouisfed.org/series/GDPC1

Federal Reserve Bank of St. Louis (2018). Retrieved from https://fred.stlouisfed.org/series/FEDFUNDS

Federal Reserve Bank of St. Louis (2018). Retrieved from https://fred.stlouisfed.org/series/PCEC96

Investopedia (2018). Retrieved from https://www.investopedia.com/terms/f/federalfundsrate.asp

Investopedia (2018). Retrieved from https://www.investopedia.com/terms/p/pce.asp

McConnell, C., Brue, S., & Flynn, S. (2014). Economics (20th ed.). Retrieved from The University of Phoenix eBook Collection.

Real Gross Domestic Product

Real Personal Consumption Expenditures

Effective Federal Funds Rate

Consumer Price Index for all Urban Consumers: All Items Less Food and Energy

30 Years