Financial Statement, Cash Flows, and Taxes - Research Paper Example

Gradually pressure went on increasing on the banks so the reserve banks allowed local banks to lower both the lending as well as borrowing rates.According to economic theories when demand goes down, the governments introduce more liberal monitory policy so that more liquidity can be introduced. As soon as the reserve banks reduce their interest rates, following the trend other banks have to reciprocate the same and they also lower the interest rates. So it becomes more convenient for business persons to opt for debt capital which is available at a much lower rate.

In the downturn economical phase, it becomes too difficult to raise equity capital from primary markets hence lower interest attracts the companies who have expansion plans.The financial environment and the interest rates are related to each other and while setting the interest rates government takes into account the financial environment more seriously. The financial environment comprises of many factors such as money market, capital market, secondary market, primary market, debt markets, liquidity state of the economy, the performance of banks and their level of profitability, business performance in the nation, demand and supply state and so on.

Rather than the home country, the financial condition of neighboring nations and the state of the international market also influences interest rate.When the financial environment in the US was poor due to the subprime crisis, Fed reduced interest rates to sub-zero levels with an aim to boost demand and introduce liquidity in markets. Loans were quite cheap for the business entities so that they can start new projects. All this will result in more jobs and a reduction in the rate of unemployment and a higher demand for raw material and other facilities.

There was a plan to accelerate the production cycle but stimulating the demand in the US economy through the lower interest rate.