Interest rates have and will always be used by the Federal Government as an instrument to tighten or expand the U.S. economy. Interest rates, adjusted for inflation, rise and fall to balance the amount saved with the amount borrowed, which affects the allocation of scarce resources between present and future uses1. The Federal Government uses both fiscal and monetary policies to adjust the spending levels within the economy. Fiscal policy refers to the government increasing and/or decreasing taxes or spending to control economic growth while monetary policy is the use of interest rate fluctuations to achieve this same goal. Interest rates influence the borrowing and saving of business investors, consumers, and government agencies1. If the economy is expanding too fast or tumbling out of control, the government steps in and attempts to correct the imbalance. A weakened economy is usually sparked by a drop in interest rates while an increase in rates usually signals inflationary rise. High inflation is the result of money supply increasing at a rate greater than the expansion of the economy. Governments may opt to use one or a combination of both policies to attain the desired result.
The common theory involving interest rates is that as interest rates rise consumers and producers will save more and purchase less and as interest rates fall they will save less and purchase more. Ultimately, the government is increasing/decreasing incentives for persons to save or spend. This theory works well for the corporate arena but is not necessarily true for the consumer side of the equation. Today, people have the ability to spend more and more because of the increasing credit handed to consumers. ...