Question

The newly elected president Susan implements some policies with the intention of boosting income. She succeeds at her goal, since households experience an increase in their incomes. Firms, however, become more cautious about the future of the policies. They think that the policies are only temporal and expect economic conditions to worsen in the future.

a. What is the effect on interest rates of such policies?

b. What is the effect on the number of loans?

Answer 1

given questions,

a. What is the effect on interest rates of such policies?

explanation,

susan is the newly elected president and she implemented some policies for the purpose of boosting the income of the people.

there will be some effect on interest rates by implementing the policies which are with an intention to increase the income of the people.

since the policies are implemented and succeeded in raising the income of the people, there is a scope for decreasing the interest rates in the country. generally there is a link between the interest rates and the income of the people because when the central government decreasing the interest rates there is chance for more liquidity in the economy and the people are not interested to deposit in the banks because of low interest rates or low returns.so, there is scope for more money in the hands of the people

firms will also enjoy some low interest loans so, there is a chance for growth in the economy.

b. What is the effect on the number of loans?

explanation,

Due to some effect on interest rates there is a chance for more number of loans to the firms in the economy. when the interest rates are low the banks will provide the loans to the people and the firms at large.

since the number of loans are more there is scope for raising the debt levels in the economy that's why the firms and business enterprises thinks that this type of policies will fail in the future if the government continuing these policies further.