Effect Of Lowering Inflation

Effect of Lowering Inflation

Introduction:

According to the case study the author writes about the effect of lowering inflation, the federal system has decreased the interest rates in order to stimulate growth. However the author states that the lowering of rates may result into inflation in the economy, the federal will however observe data to observe inflation when the rates are lowered and if inflation rises then the federal will definitely raise the interest rates.

The effect of lowering interest rates;

When the federal lowers interest rates then this will stimulate economic growth. Lowering interest rates will enable investors to invest more and as a result increase the GDP level. When investment increases then there will also be an increase in employment levels leading to economic growth as income rises. When the rate is lowered the money supply in the economy will rise because the cost of borrowing money will be reduced, this will stimulate demand in the economy which will lead to economic growth.

However lowering of interest rates will lead to inflation, but high inflation rate will be observed when the interest rates are lowered by a high margin but in our case the rate is only lowered by a very low margin. Therefore a decline in interest rates has its own adverse effect which is

Effect of Lowering Inflation

inflation, inflation is the persistent rise in prices of goods and services for a long period of time and this may lead the economy into a recession. A recession is characterised by low levels of aggregate demand, low interest rates, high inflation levels and low or zero economic growth.

Interest rates and economic growth;

When the rates are lowered then the level of investment will increase, the increase is attributed to the low cost of borrowing funds. When investment increases in an economy then the level of economic growth is high and at the same time there will be increased employment. Increased employment will lead to increased income per capita and the increased income per capita will increase aggregate demand and this will result to economic growth. Therefore the lowering of interest rates is an advantage in that the economy will experience growth and high employment levels. The effect of lowering interest rates on investment can be explained by the multiplier effect and the accelerator effect.

REFERENCE:

Washington post (2007) the fed lowers interest rates, retrieved on 5th November, available at www.washingtonpost.com