Introduction to Economics

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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. This was the 13th reduction in short term US interest rates, from 6.5 per cent at the start of 2001. The aim of the work is to explain, what the three main channels through which the interest rate will influence aggregate demand are, and how these impacts are applicable to the US economy through the period of 2002-2004.


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. ...
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