Summary: Reducing Interest Rates

Improved Essays
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 …show more content…
This action is defined as expansionary fiscal policy, the government as two tools to affect the economy government spending and taxes. In this case the government used both, increasing spending and reducing taxes. This has an immediate effect on output (Y) in the goods and services market. Increasing Y substantially, consequently the increase in Y causes an increase in money demand in the money market. Money demand and the interest rate are directly correlated so the interest rate goes up also. As previously discussed, the interest rate increases causes business to decrease their investments because it costs more for them to borrow the money to expand their business. This decrease in investment affects output negatively, bringing it back down though not as much because this effect is secondary. The secondary effect for fiscal policy is known as the crowding-out effect, the tendency for increases in government spending to cause reductions in private investment spending. In this case the crowding-out effect was great due to large sensitivity in the interest …show more content…
This has to do with time lags, which we discussed in class during chapter 15. He says this is due to the long time it takes for Congress to pass a bill to get the economy out of recession. And in this time it takes, the economy has already started to recover so the need for expansionary fiscal policy is not there. Because if deployed while the economy is recovering, it can lead to too much rapid expansion in a short period of time. This lag Feldstein is talking about is called implementation lag. During the lectures, Professor Petry defined implementation lag as the time it takes to put the desired policy into effect once economists and policy makers recognize the economy is in a boom or a slump. Professor Petry also noted that the implementation lag for fiscal policy is always much greater than for monetary policy. Thus, the statement from Feldstein is consistent with what we have learned in Econ 103. Though the government did utilize fiscal policy in the great recession. This can be explained because the government realized the economy would not be coming out of the recession anytime soon, so they went ahead and implemented the policy. The risk for mistiming the policy was so small, they could take the chance on

Related Documents

  • Improved Essays

    It is also one of the hardest topics to judge. Whether to raise the minimum wage or not is always questioned. Raising the minimum wage is beneficial for decreasing the gap between the rich and the poor, and increasing the consumers purchasing power. However, there are also consequences when it 's increased. Raising the minimum wage increases unemployment, decreasing the productivity of businesses, and increases inflation, which can possibly lead to hyperinflation.…

    • 1320 Words
    • 6 Pages
    Improved Essays
  • Improved Essays

    They even make sure that the government will increase or decrease interest taxes, to prevent the economy to borrow money from the banks. In spite of the government is using fiscal policy to cut out income taxes and improve prosperity in the country, it eventually leading the rise of inflation when the government is borrowing too much from the Federal banks and the United States is in the deficit budget. As a result, the people turns to the monetary policy as a way to fix inflation. The Federal Reserve Bank is managing the economy by controlling the interest rates of the markets. The only way to lower inflation is by increasing interest rates to fix the economy.…

    • 1476 Words
    • 6 Pages
    Improved Essays
  • Great Essays

    In the article, the author talks about the economic effects of deflation in several aspects: goods and services market, consumption and investment, unemployment rate, and debt. Initially, the author clams that deflation drives a fallen price in consumer market which causes of “hoarding cash”, and “delaying purchases”. For instance, despite the fact of the cut-price fuel benefits consumers, deflation causes some negative effects in the economy. Also, the falling price boosts the purchasing power in short run which causes the part-time worker raises in the labor force, and leads unemployment rate fall. At the end of the article the author shows the falling price suspends the investment and makes the debt become impassible to pay.…

    • 1183 Words
    • 5 Pages
    Great Essays
  • Improved Essays

    If the national debt grows, interest rates and how much the government owes increases, and then the government will spend all their resources and money on paying off the debt. The government could use their resources, time, and money on programs, creating new jobs, and helping businesses, but they have to pay off their debt. Interest payments and high interest rates get in the way of the government expanding the economy. Moreover, the national debt slows down economic growth in the private sector with higher interest rates. Therefore, the private sector will have negative outcomes, and the private sector will borrow less money.…

    • 728 Words
    • 3 Pages
    Improved Essays
  • Superior Essays

    That is to say, the more money in the economy the more customers would buy Aveeno Eczema Therapy. Contracting Monetary Policy: congress and the president create these policies to increase government income while the economy is doing well and to prevent an economic bubble. It is also a policy used by authorities contract the supply of money a deduce economic activities by increasing the interest rate. This is done by a reduction in the money supply in the economy. A higher interest rate would reduce the production and demand of Aveeno eczema therapy as there would be little money in…

    • 1251 Words
    • 5 Pages
    Superior Essays
  • Superior Essays

    “An example would be the Federal Reserve’s intervention in the early 1980’s… This hike resulted in a recession, but did keep spiraling inflation in check” (Monetary). Fiscal spending is based on government spending. The government will use changes in taxes and increase spending to influence the economy. When the economy enters a recession the government…

    • 1347 Words
    • 6 Pages
    Superior Essays
  • Improved Essays

    In this, jobs market would expand all while businesses would become larger have more room for more workers and more need for labor in the general public. President Reagan again foresaw this eventually would boost the economy and bring in for the revenue by creating a larger tax base in the long run. (Longley, Mayer, Schaller, 2015) The theory of supply-side economics was developed in 1979, by economists Arthur Laffer showing how tax cuts would stimulate the economy to the point where the tax base expanded. (IPA, 2015) Tax cuts meant more money for the consumers intern they would spend this money boosting economic growth for businesses. The business with boost in sales would need to hire more workers to handle supply and…

    • 786 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    1: What is Trickle-down economics Trickle- down economics is the idea that the money that the “Super Rich” spend circulates and promotes growth in the economy and benefits others. It is the theory that the drivers of economic growth are people that are successful in the economy and that from the tax cuts they receive they will spend more of their money in the economy and invest in business’s which will supposedly generate more jobs. Yet if this is in fact true then why is it that the living conditions are still bad and jobs are at an all-time low. It is promoting inequality and creating a bigger divide between the working class citizen and the super-rich. According to research done by (YouTube video) Britain is the only economy that has grown…

    • 851 Words
    • 4 Pages
    Improved Essays
  • Superior Essays

    Inflation In Canada

    • 1208 Words
    • 5 Pages

    As the demand for products and services is increasing, producers increase the prices and can ultimately cause inflation. The government needs to help stabilize the rate of inflation as it decreases the wealth of every citizen. Being able to stabilize inflation is important as it prevents hyperinflation which will destroy an economy (pg 62). Germany in the…

    • 1208 Words
    • 5 Pages
    Superior Essays
  • Great Essays

    However, raising the tax rate when it is already high actually reduces tax revenue, reducing the amount of money that could benefit the people as a whole and thus the economy. The article, however, explains that this relationship between tax revenue and tax size is not applicable in reality, since there are many loopholes, such as tax evasion, that can cause revenues for wealthier individuals to rise when…

    • 1219 Words
    • 5 Pages
    Great Essays

Related Topics