1. A nominal interest rate is defined as "the opportunity cost of holding or using money." Explain what you understand this definition to mean.
2. When the economy is in a recession, the Federal Reserve usually cuts interest rates. Why would the federal government do this?
3. How does your saving and spending profile change depending on the state of the economy, i.e., whether the economy is in a recession versus expansion? Do interest rates play a role in your decisions? Why or why not?
4. If interest rates are at a level of 1% and expected inflation is 2%, would you prefer saving or spending your money? Justify your answer.
Choosing two of the following concepts, define each and explain how each could apply to personal financial and credit decisions.
· Anchoring
· Mental accounting
· Herd behavior
· Prospect theory