The objective of financial policy, at the very least in this easy model, is impact the interest rate so the rate of interest will influence the degree of planned investment Ip. After we change Ip, the further impacts work just like a improvement in federal federal government investing, G, into the income-expenditure model offered within the chapters 9 and 10.
Care number 1: that above-described group of causal links — through the Federal Reserve into the cash supply towards the rate of interest into the willingness of capitalists to borrow to fund money investment — could be the way that is only tale works. You are lured to try to make other, more links that are direct. Resist the temptation. They will be incorrect. For instance there isn’t any necessary direct link between a rise in the income supply and much more investing. Something that impacts income/output that is national must originate from a modification of need for items/services, which must originate from a conclusion about why C, Ip, or Y can change. Read more