In: Economics
Does expansionary monetary policy impact the federal budget? Briefly explain why or why not.
Expansionary monetary policy Lower interest rates make it
cheaper to borrow; this encourages firms to invest and consumers to
spend.
Lower interest rates reduce the cost of mortgage interest
repayments. This gives households greater disposable income and
encourages spending.
Lower interest rates reduce the incentive to save.
Lower interest rates reduce the value of the Pound, making exports
cheaper and increase export demand.
Cutting interest rates isn’t guaranteed to cause a strong economic
recovery. Expansionary monetary policy may fail under certain
conditions.
If confidence is very low, then people may not want to invest or
spend, despite lower interest rates.
In a credit crunch, banks may not have funds to lend, therefore
although the Central Bank cuts base rates, it is still difficult to
get a loan from a bank.
Commercial banks may not pass the base rate cut on.When business
loans are more affordable, companies can expand to keep up with
consumer demand. They hire more workers, whose incomes rise,
allowing them to shop even more. That's usually enough to stimulate
demand and drive economic growth to a healthy 2-3 percent rate.