Government Policies: Impacting Economic Growth

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Government policies: Impacting economic growth Lowering or raising interest rates is one of the most common methods used by the government to have an impact upon the economy. When the economy is sluggish, the Federal Reserve Bank lowers interest rates, to encourage consumers to borrow more and spend more. It also lowers the discount rate, or the rate at which it lends money to institutions within the federal banking system, which gives banks more assets to lend. In contrast, when it wishes to slow down economic growth because of fears of inflation, it will raise the interest rate, to encourage consumers to borrow more and it will raise the discount rate as well. "The federal funds rate is the central bank's key tool to spur the economy and a low rate is thought to encourage spending by making it cheaper to borrow money. The Fed has kept the rate near zero since 2008" and has resolved to continue to keep rates low until at least 2013 (Censky 2011). For borrowers, such as people who are taking out student loans and car payments, this is good news. The Federal Reserve can also change the reserve requirements of banks. "Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities" (Reserve requirements, 2012, Fed). When banks have high reserve requirements, as determined by the Fed, they have less money to lend to consumers. Conversely, when the Fed lowers reserve requirements, more liquid capital is
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