When the economy experiences a decline (lower GDP, meaning a recession), the result is higher unemployment...

When the economy experiences a decline (lower GDP, meaning a recession), the result is higher unemployment rates. So, one of the policies that the government can use to increase GDP, which lowers Unemployment Rate is to lower interest rate. Now, how does a lower interest rate lead to higher GDP and lower unemployment? explain the process.

Expert Solution

Starting from the point where the economy is already at a recession, the government will adopt an expansionary fiscal policy and that will increase the income of the people and shift the aggregate demand curve to the right. The new equilibrium will be at a higher price and higher output.

Now, taking the monetary policy into account. An expansionary monetary policy will increase the money supply in the market, that will increase the amount of money with people, they will increase the demand for bonds and that will increase the price of bonds and decrease the interest rate.

At a lower rate the investment will increase and at a higher investment the economic activity in the market will increase, To fulfill that the firms will have to increase the hired people, that will increase the employment and income of the people, they will demand more and that will increase the price of the things and output.

Rahul Sunny answered 1 year ago

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