The Economy : Reducing Interest Rates, And It Was Unsuccessful

929 Words Apr 28th, 2016 4 Pages
The article starts out by saying the Fed tried to upstart the economy by reducing interest rates, and it was unsuccessful to jumpstart the economy. A reduction in the interest rate, is an expansionary monetary policy. Meaning it is a policy the Fed uses to increase the money supply in the economy. This policy affects many markets, the first market being the money market. A shift to the right of the money supply line in the money market will decrease the interest rate, since money demand is downward sloping and money supply is vertical (Graph 1). After this decrease in the interest rate, the planned investment of business will increase (Graph 2). This happens because a business can now borrow the money to build a new factory for example at a lower interest rate. Meaning the business will have to spend less money on their new investment. Then, the increase in investment cause the output of the economy as a whole to increase (Graph 3). This effect is seen in the goods market with the aggregate expenditure line increasing, crossing the 45 degree line at a point further along the x-axis (output). The aggregate expenditure line is made up of the sum of consumption plus investment plus government spending. Though this is not all good news as we do have a less effective secondary effect. Since the output went up, the money demand also has to go up in the money market, because they are directly related (Graph 4). Money demand makes a slight increase to the right, increasing the…

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