Among other things that influence rates, monetary policy is also one of them. Democratic govts use two policy tools to help their economies flourish. There's the economic policy and monetary policy.
First, let us debate the difference of economic policy to monetary policy. Economic policy pertains to the power of the governing body with congresses or parliament's consent to decrease or increase taxation rates. To extend tax levels, would mean to take away the throwaway income of civilians. Think of it this way, the economy is a wheel. The movement of money and
payday advance makes the wheel turn. When folk spend less money, the economy turns slowly.
so the presidency increases taxation. The extra money the government collects is then spent on projects which will pour money back into corporations for government remitted projects. These corporations in turn will give them back to the people by employing more staff or by paying their existing ones with more. Such spending is often referred to as'pump-priming' activities.
Another instrument of fiscal policy would be for the government to borrow money for its expenditures. They do this so as not to over tax their voters and provoke protest actions against their management. However, borrowing is not necessarily an option. Lenders don't simply part with their funds. The general economic environment is placed into consideration.
But enough about fiscal policy, we are here to discuss the influence of monetary policy on IRs. Now, bearing in mind that the economy is a wheel with money as the gas, monetary policy is the power of the government to manipulate the flow of money in its society. When interest rates are high, the tendency of people is to manipulate their spending and as much as feasible keep away from incurring debts.
This in turn slows down the movement of money in society. So one plan the govt. employs is to lower down the interest rates, to attract folks to borrow money and spend them on projects or companies. Who among us wouldn't all of a sudden think of buying houses, automobiles or expansion of current businesses when awfully low rates prevail? Such interest rates would make you think your money will earn more by investing it where yields are higher.
When the
economy is in peril of overheating ( when expansion is too fast, threatening a rise in inflation ), the government increases interest rates to make access to excess money more expensive and arrest spending. Normally, such policies are implemented by a central bank that has more influence with creditors like banks and other fiscal institutions.
the real reason that govts undertake such measures is to spur or to impede the economic expansion thru introduction of the monetary policy. Interest rates become a tool to help manage the economy.
in effect , the monetary policy can be gleaned to be tied up with rates. However, just as stated earlier, there are a lot of macroeconomic factors that may affect interest rates. Inflation, demand and supply for money and other general economic indicators are routinely related to one another, which in turn dictates which IR to peg.
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