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"At the end of June 2003, the Federal Reserve cut interest by a quarter-point to 1.0 per cent, their lowest level in 45 years. Explain the three main channels by"
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f the aggregate demand in the economy, - consumption, investment and government spending, these appear to be the three main channels, through which interest rate influences aggregate demand. The decrease of the interest rates accounting other factors being stable, leads to the increase of the new equipment among firms, which they plan to purchase, it also increases the number of new houses, and the goods of long-term use. Changes in the price levels through the impact on the amount of money in use also influence interest rates. Changes in the interest rates, caused by the changes in the price levels, changes the aggregate demand on goods and services; however, in graphic form this does not make the aggregate demand curve shift; it only reflects the movement along the already existing line. (Handa: 2000)
However, interest rates also create another impact. No matter what may be the reason of the interest rates change, their level impacts aggregate demand as a whole. Separately from the price level change, the aggregate demand curve shifts with the changes in interest rates. For example, if the government comes down to the higher expenditures and loans to cover the deficit, with the other conditions stable it leads to the increase of interest rates and negatively influences the plans of expenditures for the firms and individuals. If the supply of the finances for loans increases abroad, the interest rates stay stable, keeping aggregate demand from decrease. (Handa: 2000)
Consumption is the most considerable part of the aggregate demand, and it is wise to start the discussion of the interest rates decrease with the impact it creates on consumption. Individuals acquire their incomes in the form of salary, and the capital profits. A portion of the income is spent for paying taxes to governmental structures. On the other hand, government also provides individuals with subsidies (social insurance, unemployment payments, etc.). The decision about consumption lies in the
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Indeed, its confusing structure, organization, and responsibilities make it difficult for American's to understand. In explaining the Federal Reserve, the New York Times describes it as having, “exercised more influence over economic growth and the level of employment than other government entity.”
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