What is the relationship between fiscal policy and interest rates?

Fiscal policies are economic instruments used by the government to handle the level of total demand for final goods and services in the economy. The relationship between fiscal policy and interest rates is that interest rates are one of the economic factors used to influence consumers. Fiscal policies concerning interest rates may be either expansive or focused on the contraction of demand for goods and services. Central banks or reserve banks of different nations usually play a major role in deciding on any increase or decrease in interest rates.

Governments and economists usually monitor the country's economy by studying macroeconomic factors such as inflation, aggregated demand, unemployment and supply. These factors are studied during various economic cycles that can be quarterly, every four years every year. Usually there is a target result that economists long for the economy. When there is a marked delay of the results such as growingInflation, some monetary and fiscal policies will be introduced to help stabilize the economy.

One of the causes of inflation is the excessive demand for services and goods that cause a gradual or incremental increase in the price of such goods and services, pushing an increasing increase in demand, which usually outweighs the supply. This is a place where the link between fiscal policy and interest rates can be seen, as the central bank can try to control the growing inflation by introducing higher interest rates. Such an increase in interest rate by the central bank will influence other banks in some way. First, banks will be less willing to offer loans for previous rates and increase interest on any loan to customers and consumers. This also affects the interest rate charged on credit cards and other rnada financial fees.

When this happens, the expected result is that the rate of consumption falls toIf excessive interest fees on loans and use of credit cards. All things are the same, it will reduce the rate of demand and consumption, which will lead to a reduction in inflation powered by demand. Another relationship between fiscal policy and interest rates is the second main effect to increase the interest rate by the central bank to other banks. These banks usually encourage consumers to save more than they spend, by raising interest rates paid for savings, even if they raise interest rates on loans.

This relationship between fiscal policy and interest rates is double, because the central bank can also reduce interest rates when the economy is slow with the hope that such an increase will encourage people to spend more money. When reversing their reaction, when the central bank increases interest rates, the banks will laugh the interest paid on the savings. It is also designed to encourage people to spend, rather than save their money.