Among other things that affect the interest rate, monetary policy is also one of them. Democratic governments use two policy tools to help their economies grow. No fiscal policy and monetary policy.
First, let's discuss the difference of fiscal policy with monetary policy. Fiscal policy refers to the power of the government to consent Congress or Parliament to increase or to lower tax rates. To increase tax rates would mean the elimination of disposable income civilians. Think of it this way, the economy is a wheel. The movement of money makes the wheel. When people spend less money, the economy turns slowly. So the government raises taxes. The extra money the government collects is then spent on projects for companies paying money in the mandated government projects. These companies, in turn, will give people using more employees or paying them more existing. This expenditure is also known that the activities "reactivation".
Another instrument of fiscal policy would be for the government to borrow money for their expenses. They do this in order not to tax its citizens and provoke protests against his administration. However, borrowing is not always an option. The lenders do not easily separated with their funds. The general economic environment is taken into consideration.
But enough about fiscal policy, we are here to talk about the influence of monetary policy on interest rates. Now, given that the economy is a wheel with silver as gas, monetary policy is the government's power to control the flow of money into their society. When interest rates are high, the tendency of people is to control your expenses and, if possible, stay away from borrowing money. This slows the flow of money in society. So one of the strategies used by the government's low interest rates to encourage people to borrow money and spend them on projects or business. Who among us can not suddenly think of buying houses, cars or expansion of existing businesses, where very low interest rates prevail? These interest rates would have you believe that your money will earn more by investing where returns are higher. When the economy is in danger of overheating (when growth is very fast, the threat of higher inflation), the government raises interest rates for access to too much more expensive and stop spending money. Typically, these policies are implemented by a central bank that has more influence with creditors such as banks and other financial institutions.
The main reason for the governments of these measures is to stimulate or inhibit economic growth by introducing undertake monetary policy. Interest rates are becoming a tool to help manage the economy.
Indeed, monetary policy can be drawn to be bound to interest rates. However, as stated above, there are many macro factors that affect interest rates. Inflation, supply and demand for money and other general economic indicators are generally linked to each other, which in turn dictates what kind of interest PEG.
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