Brazilian Interest Rates
Article: Interest Rate Hikes in Brazil http://online.wsj.com/news/articles/SB10001424052702303626804579505673346899690 http://www.reuters.com/article/2014/04/02/brazil-economy-rates-idUSL1N0MU0O420140402
As the global recession still lingers, countries have been looking for different ways to stimulate the economy. There are multiple ways to stimulate the economy, primarily through monetary and fiscal policy, action taken by the central bank and government respectively, in order to adjust money supply. In order to stimulate their economy, Brazil decided to opt for expansionary monetary policy by cutting interest rates in hope of boosting the economy. To assess how this will work in Brazil, it is necessary to analyze the pros and cons of monetary policy along with considering other options.
Interest rates are being cut due to the continuing slowdown in the global economy which makes it necessary to analyze how decreasing interest rates will help the economy. A cut in interest rates will cause the demand for money to increase which will in turn cause the supply of money in the economy to rise. Additionally, investment will increase because of the shift in money supply and increase along the money demand curve because it is now easier for consumers to borrow money. Finally, and perhaps most importantly, the aggregate demand will shift out due to the decrease in interest rates, which causes an increase in consumer spending, both determinants of aggregate demand. The shift of aggregate demand will then ideally eliminate the recessionary gap experienced because of the recent decreased demand due to the slowdown in the economy.
Other than monetary policy, Brazil can also consider fiscal policy by getting the government involved in setting the supply of money. The government can do this in one of two ways, reducing taxes, or increasing government spending. Lowering taxes would in essence increase consumer spending because less money would be taken away from
As the global recession still lingers, countries have been looking for different ways to stimulate the economy. There are multiple ways to stimulate the economy, primarily through monetary and fiscal policy, action taken by the central bank and government respectively, in order to adjust money supply. In order to stimulate their economy, Brazil decided to opt for expansionary monetary policy by cutting interest rates in hope of boosting the economy. To assess how this will work in Brazil, it is necessary to analyze the pros and cons of monetary policy along with considering other options.
Interest rates are being cut due to the continuing slowdown in the global economy which makes it necessary to analyze how decreasing interest rates will help the economy. A cut in interest rates will cause the demand for money to increase which will in turn cause the supply of money in the economy to rise. Additionally, investment will increase because of the shift in money supply and increase along the money demand curve because it is now easier for consumers to borrow money. Finally, and perhaps most importantly, the aggregate demand will shift out due to the decrease in interest rates, which causes an increase in consumer spending, both determinants of aggregate demand. The shift of aggregate demand will then ideally eliminate the recessionary gap experienced because of the recent decreased demand due to the slowdown in the economy.
Other than monetary policy, Brazil can also consider fiscal policy by getting the government involved in setting the supply of money. The government can do this in one of two ways, reducing taxes, or increasing government spending. Lowering taxes would in essence increase consumer spending because less money would be taken away from