Jesus Loves Me
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The government can also increase taxes or lower government spending in order to conduct a fiscal contraction. What this will do is lower real output because less government spending means less disposable income for consumers. And, because more of consumers wages will go to taxes, demand as well as output will decrease.
A fiscal expansion by the government would mean that taxes are decreased or government spending is increased. Ether way, the result will be growth in real output because the government will stir demand with increased spending. In the meantime, a consumer with more disposable income will be willing to buy more.
If interest rates increase, that means that people will borrow less as its now more expensive to borrow. Hence both consumption and investment will tend to decrease (corporates now find it more expensive to borrow money to finance capital, hence will purchase less capital); hence Aggregate Demand would shift to the left.
Now, this will cause a decrease in price levels; hence a decrease in inflation. According to keynesian thoery , and the SR Phillips Curve, a decrease in inflation will cause an increase in unemployment.
te credit crisis (which was caused by a low-interest-rate policy in the first place), the Federal Reserve dropped the Federal Funds Rate to between 0.25% and zero in December of 2008–where it has stayed for 30 months now. Treasury bills pay about zero today. The three-year, five-year and 10-year U.S. Treasuries; they all yield below the inflation rate.
Think about all the seniors (million of them) that were planning to receive interest income during their retirement years on money they worked hard to save. Those dreams are lost. Take a senior who has $1.0 million in the bank. The senior wants to avoid risk and thus opts for a 10-year U.S. Treasury paying three percent interest. Thats $30,000 a year. Take away personal income taxes and the senior realizes he/she cant live off the interest $1.0 million in cash generates. Low interest rates are killing the retirement plans of millions of seniors.
Prolonged low interest rates in a country ultimately lead to money flowing out of the country to places where money can yield a higher return. Low interest rates are doing just that. By keeping interest rates artificially low, money is flowing