Among other things that influence rates, financial policy is also one of them. Democratic governments use 2 policy tools to help their economies flourish. There is the financial policy and financial policy.
First, let us debate the difference of fiscal policy to financial policy. Economic policy applies to the power of the government with congresses or parliament's agree to increase or decrease tax rates. To increase tax rates, would imply to take away the disposable salary of civilians. Think about it this way, the economy is a wheel. The movement of money and payday advance makes the wheel turn. When folk spend less money, the economy turns slowly.
so the presidency increases taxation. The extra cash the govt. collects is then spent on projects which will pour cash back into firms for government remitted projects. These companies in turn will give them back to the people by employing more workers or by paying their existing ones with added. Such spending is often referred to as'pump-priming' activities.
Another instrument of financial policy would be for the government to borrow cash for its expenditures. They do this so as not to over tax their citizens and provoke protest actions against their management. However, borrowing is not necessarily an option. Banks do not simply part with their funds. The general business environment is placed into consideration.
But enough about financial policy, we are here to discuss the influence of financial policy on interest rates. Now, bearing in mind that the economy is a wheel with money as the gas, financial policy is the
power of the regime to manipulate the flow of money in its society. When rates are high, the disposition of people is to manipulate their spending and as much as feasible keep away from incurring debts.
This in turn slows down the movement of money in society. So one method the govt employs is to lower down the rates, to attract folks to borrow money and spend them on projects or businesses. Who among us would not all of a sudden think about buying homes, automobiles or enlargement of current businesses when really low rates prevail? Such IRs would make you think your money will earn more by investing it where yields are higher.
When the economy is in peril of overheating ( when expansion is too fast, threatening a rise in inflation ), the government increases IRs to make access to excess money dearer and arrest spending. Normally, such policies are implemented by a central bank that has more influence with creditors such as banks and other finance establishments.
the real reason that govts undertake such measures is to spur or to impede the business expansion thru introduction of the financial policy. Interest rates become a tool to help manage the economy.
in effect , the financial policy can be gleaned to be tied up with rates. However, just as stated earlier, there are a lot of macroeconomic factors that can affect interest rates. Inflation, supply and demand for money and other general economic indicators are typically related to one another, which in turn dictates which IR to peg.
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