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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?'

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Question:
If the result is an increase in the growth of real output/income, what would you expect to happen to interest rates if the ...

Solution Summary

This solution gives a simple but clear explanation of the effects of interest rates on money supply.

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