In order to control the money supply the government cut borrowing and spending, which in theory would reduce the money supply, inflation and unemployment but interest rates had to rise to stop consumer borrowing, which in turn increased the exchange rate. High interest rates curbed consumer borrowing, which reduces demand for products, along with a high exchange rate ruining demand for exports ... ... middle of paper ... ...ector borrowing is not the enemy of unemployment. If the government borrows too much then there will have to be increases in taxes, mainly corporation tax and this will also contribute to some unemployment, but the public sector does help employment in some ways. Education and training (funded by the government) provides a skilled, desirable workforce, which will encourage British firms to employ British workers instead of looking for other skilled workers in an increasingly globalized world. The National Health Service also reduces the amount of residual unemployed and therefore contributes to keeping employment levels high.
In the short-run, the relationship between unemployment and inflation is inverse. This means that the change in one will have the opposite effect on the other. So here, a fiscal policy aimed at reducing unemployment will increase the interest rate. For example, if Bartavia decides to lower taxes to increase consumption thru use of consumer’s marginal propensity to consume, and the economy in general thru the multiplier effect, it will increase the aggregate demand for goods and services. Marginal propensity to consume is the idea that that consumers will spend more money if they have more, but increases in income do not lead to equal increases in consumption because people save some of the money.
As a result of this economic growth families will begin to feel more confident and will begin to spend more of their money instead of saving it because they believe that will receive a pay raise or will find a better job. (Amadeo, 2016) Borrowing also increases when economic activity is high people begin to borrow from banks and other places because they feel that the government has been doing a great job managing the economy. (Amadeo, 2016) As we have seen in 2008 people should never get to confident in the economy because our economic bubbles are used to crashing when they are doing very well and it’s never really the people’s fault it’s the governments. Although inflation begins to rise when the economy is doing great one of the things that is known to bring prices down is competition among businesses. Competition is great because one company will attempt to sell a product for a cheaper price than another company which results in lower prices the same as you see with cell phones and automobiles.
When the Central Bank uses expansionary monetary policy, the money supply increases whilst the interest rates fall. This is because when money is readily available in the economy due to monetary expansion, the interest rates will fall due to the fact that people will be more willing to make loans as oppose to taking out loans. Reduced interest rates will cause domestic financial and capital assets to become less attractive as a result of their lower real rates of return. In addition to this, foreigners will reduce their position in domestic bonds, real estate, stocks and other assets. The financial account with deteriorate as a result of foreigners holding fewer domestic assets.
Lower taxes will increase consumers spending because they have more disposable income. This will worsen the govt budget deficit. The other method is Deflationary fiscal policy this involves decreasing AD therefore the government will cut their spending and or increase taxes. Higher taxes will reduce consumer spending. This will lead to an improvement in the government’s budget deficit.
Lastly through the reduction of trade barriers it can lead to trade creation, which occurs when, the consumption switches from high cost producers to low cost producers. This creation of trade can help not only the economy but consumers as well and have many positive effects. Free trade reduces the prices of goods and services to consumers. These lower prices are a result of increased competitiveness when a country opens its borders. There is more competition therefore this pushes the prices that domestic producers charge down because a lot of the imported goods coming in are cheaper therefore the producer surplus decreases but the consumers surplus increases (Feenstra, 2011).
The not good effects would include; The company will probably suffer from sales drop. As the Law of supply and demand states, increasing the prices for goods and services reduces their demand while their supply increases. Customers will prefer buying from the company’s competitors where the prices are relatively cheaper. By this company’s sales will be
From nominal and real rates there are also lowered and raised rates. When the interest rate is lowered consumer spending grows while savings decrease. Spending on items such as housing becomes one of the ways the AD rises. Though AD rises it pulls the economy out lack of spending, but puts the economy into the possibility of inflation. Differentiating from low rates, high rates stop inflation but creates the possibility of recession.
Has the Fed lowered long-term US growth expectations? Lacklustre Productivity Produces Stagnant Economy? I have periodically commented on the view held in some circles that US potential GDP growth has stagnated, due to a combination of real and monetary factors. The important real factor is productivity, because it is crucial in linking economic growth to employment. In the UK, for example, productivity growth since the Great Recession has been appalling, but it helps to explain the faster-than-expected declines in unemployment, as well as the below-par recovery in corporate profitability.
Futhermore, European Central bank helped to recover from recession by reducing interest rate. It is aim to reduced the inflation. As the inflation increased, people will need more money to buy a goods. To avoid this to happen, ECB reduce thr interest rate to keep inflation rate low. The above diagram shows the GDP growth rate of United States of America during the recession.