Effects of interest rates on money supply
During the summer of 1997, Congress and the president agreed
on a budget package to balance the federal budget. The “deal,” signed
into law by President Clinton in August as the Taxpayer Relief Act of 1997,
contained substantial tax cuts and expenditure reductions. The tax reductions
were scheduled to take effect immediately, however, while the expenditure cuts
would come mostly in 1999 to 2002. Thus in 1998, the package was seen by
economists to be mildly expansionary. This solution answers these economic
riddles ‘what will happen to the interest rate if the objective is an increase
in the growth of real output/income?’, What would you expect to happen to
interest rates if the Fed holds the money supply (or the rate of growth of the
money supply) constant? and What would the Fed do if wanted to raise interest
rates? What if it wanted to lower interest rates?’
