Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Michaela Smart

2/03/15

Discuss the effectiveness of lowering the rate of interest in order to stimulate economic
growth - 18 marks
Economic growth is a change in the productive capacity of an economy
...

The government change the rate of interest in order to affect economic growth part of their
monetary policy, as well as adjusting money supply and or theatrically in the UK managing
exchange rates
...
This will lead to an
increase in both consumer expenditure and investment, these are both components of
aggregate demand and this means that AD will increase from AD* to AD1 and this increases
the price level marginally to P1 from P* and increase real GDP from Y* to Y1
...
e economic growth
...
This increases Y even further from Y* to Y2 and this is further economic growth
(the price level increase more as well from P* to P2)
...
One reason for this is that the effect depends on the size and duration of the
decrease
...
This is because it the reward for
saving is still very low, or even below the rate of inflation then people will not increase their
saving
...

Another factor in determining the effectiveness of lowering the rate of interest in
stimulating is the numerical value of the MPC, if there is a high MPC (and therefore a low
MPW) then an increase in initial injections (and increase in C and I) will have a larger greater
effect on real GDP than if the is a low MPC and therefore a high MWP for the same initial
injection
...
If the multiplier was a
smaller number due to a high MPW then the increase in AD and therefore real GDP would
be smaller despite the initial injection being the same, for example AD may only increase to

Michaela Smart

2/03/15

AD1
...
5
...

Other factors may also affect the effectiveness of a decrease in the rate of interest in
stimulating economic growth
...
This is because it wiliness the leakages from the
economy, people will be paying more tax and therefore have less disposable income and so
therefore be less willing and able to buy goods and services and this will decrease AD and
therefore reduce economic growth rather than increasing it, it will also decrease job security
as less factors of production are required to produce the lower amount goods and services
demanded effecting their purchase further as they maybe unsure of their job security as
unemployment increase and negative economic growth occurs again
...

In conclusion a fall in the rate of interest is likely to cause economic growth to an extent as
and it increases borrowing and reduces saving, thus stimulating AD and LRAS
...




---