Impact of Discount Rate on Slowing the Economy
The Federal Reserve (FED) exists to ensure the stability and growth of the U.S. economy through price stability and employment. They also do it by manipulating the short-term interest rates, the discount rates, and adjusting reserve requirements. In slowing down the economy, the FED sets a high discount rate which tends to have an impact of raising other interest rates due to its representation on the level of borrowing for commercial banks and other financial institutions. Increasing the rate incentivizes the banks to have high cash reserves which they achieve by raising the interest rates on loans and savings accounts (Howard, Whitehead & Hochard, 2020) . It makes loans expensive as borrowers have to work to pay off the loans quickly. Besides, it encourages individuals to deposit money in their savings account, thus giving the bank more reserves. It, in turn, helps in taking money out of the economy; therefore, there is little money in circulation which slows down the economy.
Currency Appreciation
When one exchanges 1 U.S. dollar for 180 Japanese Yen, then tomorrow exchanges 1 U.S. dollar for 130 Japanese Yen, then the Japanese Yen has appreciated relative to the U.S. dollar. In this case, the Japanese Yen has increased in value concerning the U.S. dollar. It implies that when the two currencies are used for trading, less Japanese Yen will be used in exchange for the U.S. dollar. Currency appreciation is contributed by the growth of the economy in a country. Other factors include a lower inflation rate, higher interest rates, and favorable terms of trade in the country (Kalemli-Ozcan, Liu, & Shim, 2018) . The appreciation has an immediate impact on international business involving the two currencies. It lowers the costs for those who import products and services to Japan while lowering returns for the companies that export goods to the U.S.
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References
Howard, G., Whitehead, J. C., & Hochard, J. (2020). Estimating Discount Rates Using Referendum-style Choice Experiments: An Analysis of Multiple Methods (No. 20-01). https://ideas.repec.org/p/apl/wpaper/20-01.html
Kalemli-Ozcan, S., Liu, X., & Shim, I. (2018). Exchange rate appreciations and corporate risk-taking. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3150386
