If the interest rate is low, it will cause more funds to be available, greater expansion and increased employment. If the interest rate is high, it will cause fewer funds to be available, less expansion, and decreased employment. Fiscal policy is an important tool for managing the economy because of its ability to affect the total amount of output produced or the gross domestic product. The first impact of a fiscal expansion is to raise the demand for goods and services. This greater demand leads to increases in both output and prices.
If we do not buy imported goods then they will not buy ours and without export revenue and foreign investments we would not be able to function financially. When exports increase so does the Gross Domestic Product (GDP). GDP is the dollar amount of all goods and services produced within the United States. When the GDP is high it signifies that our economy is healthy and stable. When companies can produce more due to demand they are able to hire more workers, which can lower the unemployment rate.
As the capital is put back into the economy the demand for supplies will go up. As the demand rises the amount of supplies will also rise increasing the need for employees and in turn putting more available spending capital in the hands of the buyers. By increasing government spending there is more money being put back into the pockets of the people. This return in turn frees up capital citizens are able to put back into goods and services increasing demand. Lowering taxes can also leave money in citizen’s pockets but it also takes away from the amount of money the government is able to use to stimulate the economy by spending.
Since there will be more high income earners in an inequitable distribution of income, and the higher the income an individual earns the greater the proportion of income will be saved, savings will increase in the economy and this will reduce Australia’s reliance upon foreign capital. Unfortunately the advantages of economic inequality are accompanied with the disadvantages. Firstly, overall utility, the satisfaction for the goods and services by the consumer is reduced in our society. This theory is based on the assumption that high income earners gain less satisfaction from an increase in their income than people who earn lower incomes. The reason being as more of a certain good is consumed, it will begin to provide less utility to the consumer.
When the demand for U.S. dollars increases, the value of the dollar will increase or appreciate (Stone 2008, pp. 685). As a result, U.S. products become more expensive for foriegners causing a reduction in exports and increasing imports. This not only effects the U.S. economy, but also affects the economies in other countries. Monetary policies influence and are influenced by international developments, including exchange rates, and based on these market conditions the U.S. government can make strategic changes to these policies to maintain the country’s economic stability (full employment, stable growth and price stability).
Monetary policy is the use of interest rates to manipulate the level of aggregate demand in the economy and loose (expansionary) monetary policy is a reduction in the interest rates. This will result in an injection of extra consumption because it is cheaper to borrow money on credit cards and therefore allowing consumers to spend more which will cause an increase in aggregate demand (AD). Additionally, extra consumption will allow shops to gain more profit preventing “business failures.” Furthermore, mortgages will be cheaper and therefore consumers feel richer and there will an extra injection of consumption. AD will also increase due to an increase in investment, causing an increase in aggregate demand from AD1 to AD2 as shown below. However,
When there is a greater disposable personal income this will allow consumption to increase due to the money saved from the lower tax rate. Through consumption increasing this will favour economic because the gross domestic product has increased. When government expenditures are increased it will have a multiplier effect on aggregate demand. Because of the multiplier effect, the government can increase spending by only a small amount to achieve a larger, necessary increase in aggregate demand. By doing so, the economy will be able to attain an equilibrium level of real
Decreasing the interest rate effectively increases consumer and businesses consumption. Lower interest rates also increase investments and net exports (Hubbard, 868). These increases push true GDP back in line with potential GDP and, as a result, production increases. This increase in production also increases the need for workers, ultimately increasing employment. Conclusion The Federal Reserve is a very powerful entity and has a large amount of influence on how our nation’s economy performs.
Monetary policies influence the productivity of the country and this is how employment is affected. If there is a decrease in interest rates then more people are going to borrow money because the cost is lower. “Lower interest rates also change the willingness of financial institutions to lend money” (Federal Reserve Bank of San Francisco, 2011). With the financial institutions more willing to loan money, more people will borrow money and then there will be a higher demand for goods and services. As the demand for goods and services increase the demand for labor follows
If local prices in a country increase more than prices in another country for the same product; being is that foreign exchange forward markets are linked to interest markets; then the local currency may decline in value via its foreign counterpart, presuming there is no change with the structural relationship between the two. Balance of payments are affected when the balance of payments approach suggest that the exchange rates have come from capital transactions and trade. When the internal and external pressures are in equilibrium, this usually means the exchange rate for the equilibrium has been