By implementing EMP, as demonstrate in Figure 2, the lower interest rate causes a movement down and to the right along the demand for investment curve, increasing the quantity of funds demanded for investment. As interest rate is lower if deposit money in the bank, consumer will then shift the fund by putting money to higher return investment like in shares, government bonds or property market, aiming at higher profit. Additionally, decrease in interest rate means lower mortgage interest on property thus less burden to buy house or apartment. Consequently, this will stimulate consumer’s desire to buy property, also giving more opportunity to real estate agent which can earn commission based on buying or selling houses. If transaction on property is higher, the property value increases, so the householder earns more money which they would spend on goods and services and push the consumer index. Furthermore, for those who had a mortgage already, reduction of interest rate means they pay less mortgage interest, thus, their residual income is higher so could have more money to spend and shift the AD curve to AD1 leading to an increase in output from YE to YFE. Lastly, lowering the interest rate he...
... middle of paper ...
... from the bank to purchase goods and services. The supply of private loanable funds decreases so the decrease in money available to the private sector drives up interest rates as funds are directed towards the public sector. Hence fewer funds are available for private investors, which causes the aggregate demand curve to move back a little from AD1 to AD2 in Figure 4 as investment increases. Hence, the EFP is not effective in resolving India’s recession.
In conclusion, EMP is not fully efficient, yet by weighting the possible limitations from SSP and EFP, reducing the interest rate is currently the best option to get India out of recession. As consumption and investment rises, the increase in aggregate demand would increase the level of employment. Based on the rise in GDP, economists believe that India’s economy will gradually go back to normal function.
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