Decrease in interest rates

Thanks for your initial response to the Week 3 Discussion Question. In your post, you discussed well the US central bank, the Federal Reserve (Fed)’s monetary policy by adjusting the interest rates and money supply.

 

This week, we will extend our knowledge of macroeconomics through economic growth. Among other determinants of labor productivity and economic growth, we will cover the political and legal environment, more specifically, the government’s effect on the economy through the Fed’s Monetary Policy (Week 3) and the White House’s fiscal policy (Week 4).

 

Tax and government spending are the main tools of the Congress’ and the White House’s fiscal policy. When the economy is in recession, the government will decrease taxes and increase its spending in order to boost economic growth, GDP, and create more employment. This is the expansionary fiscal policy. We will discuss the fiscal policy in detail next week.

 

During a recession, the Fed will increase the money supply and decrease interest rates so that they could increase consumption and business investment. This is the Fed’s expansionary monetary policy.

 

All other expansionary fiscal policies of Emergency Economic Stabilization Act of 2008 and the American Recovery & Reinvestment Act of 2009, including huge increases in government spending and bailout programs, in addition to the massive quantitative easing by the Federal Reserve as their expansionary monetary policy (by increasing the money supply in credit markets and keeping Federal Funds Rate near 0% (zero) for a long time, eventually recovered the economy.

 

Class,

Why does a decrease in interest rates not always lead to desired outcomes such as an extraordinary increase in GDP and employment during a recession?

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