When monetary policy and fiscal policy are used the interest rate is affected

When monetary policy and fiscal policy are used the interest rate is affected

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Unformatted text preview: When monetary policy and fiscal policy are used the interest rate is affected. Expansionary monetary policy directly lowers the interest rate by making money easier and cheaper to obtain. Contractionary monetary policy directly raises the interest rate by making money harder and more expensive to obtain. Expansionary fiscal policy increases the interest rate by decreasing the savings rate through lower taxes and higher government spending. Contractionary fiscal policy decreases the interest rate by increasing the savings rate through higher taxes and lower government spending. Thus, monetary policy and fiscal policy both directly affect consumption, investment, and net exports through the interest rate. For example, say the Fed uses expansionary monetary policy such as purchasing government bonds, decreasing the reserve requirement, or decreasing the federal funds...
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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