The Federal Reserve, saying "the coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States," cut interest rates to essentially zero on Sunday and launched a massive $700 billion quantitative easing program to shelter the economy from the effects of the virus. The new fed funds rate, used as a benchmark both for short-term lending for financial institutions and as a peg to many consumer rates, will now be targeted at 0% to 0.25% down from a previous target range of 1% to 1.25%. Facing highly disrupted financial markets, the Fed also slashed the rate of emergency lending at the discount window for banks by 125 basis points to 0.25%, and lengthened the term of loans to 90 days. Despite the aggressive move, the market's initial response was negative. Dow futures pointed to a decline of some 1,000 points at the Wall Street open Monday morning. The discount window "plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy ... [and] supports the smooth flow of credit to households and businesses," a separate Fed note said. The discount window is part of the Fed's function as the "lender of last resort" to the banking industry. Institutions can use the window for liquidity needs, though some are reluctant to do as it can indicate they are experiencing financial issues and thus sends a bad message. Global coordinated action The Fed also cut reserve requirements for thousands of banks to zero. In addition, in a global coordinated move by centrals banks, the Fed said the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank took action to enhance dollar liquidity around the world through existing dollar swap arrangements. The banks lowered the rate on these swap line loans and extended the period for such loans. The actions by the Fed appeared to be the largest single day set of moves the bank had ever taken, mirroring in many ways its efforts during the financial crisis that were rolled out over several months. Sunday's move includes multiple programs, rate cuts and QE, but all in a single day. U.S. household debt falls amid COVID-19 spending cutbacks (Reuters) - U.S. households cut their debt for the first time in six years in the second quarter, led by a record drop in credit card balances as consumers cut back on non-essential spending during coronavirus lockdowns and paid down what they owed, a New York Federal Reserve survey showed on Thursday.The $34 billion drop in overall household debt to $14.27 trillion in the three months ended June 30 was the largest since the second quarter of 2013, the New York Fed's Quarterly Eeport on Household Debt and Credit found. By far the biggest driver was plunging credit card balances: The $76 billion decline to around $820 billion - the lowest since the first quarter of 2018 - was more than twice the previous record set i the first quarter. The senes dates to 2003. Combined with the first quarter's $34 billion reduction, consumers shaved their credit card debt by an unprecedented $110 billion, or roughly 12%, in the first six months of 2020. About a third of the decline 1 credit card debt 1s attnbutable to the bag drop in consumer spending 1n the second quarter, with the rest comung from households paying down balances. a. After reading the assigned CNBC and NYTimes/Reuters article readings, briefly summarize their main points. b. After going through the assigned Case Study Reading, draw an intertemporal budget constraint where the consumer chooses between consumption today, C1, and consumption in the future, C2. On this same space, draw a utility maximizing indifference curve of your choice and state whether the consumer is a saver or borrower in your diagram. c. In a different diagram, redraw the intertemporal budget constraint and an indifference curve that maximizes utility give the constraint. Assuming interest rates rise, draw a new budget constraint that has pivot at the point where present income Y1 eguals future income Y2. Then draw a new utility maximizing indifference curve for this new budget constraint at a point where the income effect would be negative. Draw a temporary budget line parallel to the post-pivot budget line but tangential to the pre-pivot indifference curve. Use it to identify the substitution effect and income effect. (Hint: Reverse the visual analysis in the Case Study Reading, which explains a fall in interest rates) d. Based on your diagram, is household debt a normal or inferior good? &. Would managers of a firm whose customers use debt financing to purchase its products recommend inventory/stock increases or decreases if rates rise