Interest Rate Report Scenario for Big Drive Auto Economics

Essay by maulwoofUniversity, Master'sA-, July 2009

download word file, 3 pages 1.7

Big Drive Auto OverviewBig Drive Auto is a multistate dealer of different manufacturer' trucks and cars. The company deals in vehicles, which they service and provide spare parts for repairs. Motor vehicle tires, oil, and coolant, are a significant part the business. With the current rates of economic inflation, management is constantly scanning the environment for ideas that will benefit the firm. Big drive auto analyzes volume sales data over the last 9 years as units sold in some cases and constant dollar sales in other cases.

Affect of Interest ratesInterest rates have always been a critical part of decision making in the economy. Interests rates are defined as the yearly price charged by a lender to a borrower in order for the borrower to obtain a loan (, 2009). Profits are enjoyed as money paid to the lender over what was originally borrowed. Investment decisions are affected by loans and how much extended credit for vehicle purchases Big Drive can carry on their balance sheet.

Big drive Auto, as an investor will be affected when rates go up.

Operations and planning are important to all organizations, supplier', and customers around the world. Interest rates influence operations and planning, regarding Big Drives assets and liabilities. Low interest rates allow for competitive rates and services. Higher interest rates increase operations costs, reduce business, and lose customers. When costs are not passed onto the consumer, profits decline. The operation Costs are defined as the day-to-day expenses incurred in running a business, such as sales and administration, as opposed to production (, 2009).

Yield Curve(Included a 'steep' interactive yield curve, but may not be viewable, as it is a compressed tiff file) The paper was grade w/o it too. They can be found at the reference below, and are quite nice.

(SmartMoney, 2009).

Steep climbing curves are typically generated at the bottom of a recession. They come about when short-term bond rates are less than long-term rates. This shape is typical at the beginning of an economic expansion, after the end of a recession. These curves predict for investors a period of inflation, rising interest rates, and reestablishing demand (SmartMoney, 2009). Considering the recently deteriorated performance of GM, due to the recession, a brighter prediction with increased demand can be expected for Big Drive.

Customer Demand for ProductsInterest rates and customer demand are inversely related. The higher rates are, the lower consumption is. When income is limited, customers spend less, resulting in reduced sales. Adjusting prices to overcome diminished consumer demand can be implemented. Attractive pricing strategies and creative incentives can help. Once the yield curve plays out, demand will increase and market will correct.

Dependence on Monetary VariablesVariables other than interest rates, such as business cycles, cause cyclical movements in the economy. During expansion, output and employment rise. A rapid rise in inflation may occur, due to the expansion cycle. Conversely, during a recession, decline in output of goods and services occurs. According to Liberty Fund Inc. (2009), "Burns and Mitchell defined a recession as a period when a broad range of economic indicators falls for a sustained period, roughly at least a half a year."Other monetary variables considered besides interest rates, are consumption taxes and value added taxes. Many product imports are taxable. Taxable imports include refined oil products and tires. Further consideration of growth rates and inflation should also be evaluated. GDP is related to economic growth and can help forecast Big Drive' growth. Value-added tax, can be added to import tariffs and be costly. Foreign exchange rates can affect imported material costs. A significant relation exists between Big drive' performance and macroeconomic measures.

ConclusionInterest rates can affect both lenders and borrowers. This also affects investors and buyers, while influencing consumer confidence. Performing a future risk analysis will help prepare for fluctuations that follow yield curves. Big Drive Auto can predict changes in interest rates, inflation, and costs. Evaluating the business cycle, yield curve, and data collected from previous years helps to forecast economic fluctuations. (2009). The New York Times Company. Retrieved July 9, 2009, from (2009). Retrieved July 10, 2009, from http://www.investorwords.comLiberty Fund Inc. (2009). Library economics and freedom. Retrieved July 10, 2009, from http://www.econlib.orgSmartMoney. (2009). SmartMoney:The living yield curve. Retrieved July 12, 2009, from of Phoenix. (2008). Big drive auto. Retrieved July 1, 2009, from University of Phoenix, Week Five rEsource Materials, ECO561 - Economics