How come under a MONETARY Expansion Interest rates go down and under a FISCAL Expansion interest rates go up?

How come under a MONETARY Expansion Interest rates go down and under a FISCAL Expansion interest rates go up?

I understand that when there is a Monetary expansion the money supply goes up thats why interest rates go down… but during a fiscal expansion the money supply goes up also.. so why do interest rates go up under a fiscal expansion?

By | 2013-08-27T17:19:10+00:00 August 27th, 2013|Mortgages Home Loans Interest Rate|3 Comments

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3 Comments

  1. madtecomp August 27, 2013 at 7:40 PM - Reply

    Look at the IS-LM model, it will probably be able to help you out…as for why expansionary fiscal policy raises interest rates. It shifts the IS curve to the right, increasing money demand, but the LM curve (Monetray Policy curve) stays the same. The new equilibrium point where IS=LM is at a higher interest rate. This is called crowding out, and the Fed can avoid this by increasing the money supply by the same proportion that fiscal policy expanded by.
    Money supply does not go up during fiscal expansion, mondey demand goes up. The Federal Reserve controls the money supply, not the Federal Government. Government can cut taxes, increase spending, or any other form of fiscal expansion, this will NOT increase the money supply. To avoid crowding out fiscal policy, the Fed will generally increase the money supply to meet the new money demand, which has been created by expansionary fiscal policy.
    Hope this helps you a little

  2. Homer J. Simpson August 27, 2013 at 6:51 PM - Reply

    Interest rates go down in a MONETARY Expansion because there is an increase in the money supple.

    Interest rates go up in a FISCAL Expansion because there is an increase in the demand for funds (NOT THE SUPPLY) and the government has to compete with other borrowers.

  3. Hubris252 August 27, 2013 at 6:17 PM - Reply

    Interest rates don’t go down during a fiscal expansion despite the increase in the money supply because the government undertakes fiscal expansions through deficit spending. The government’s borrowing increases the demand for loanable funds driving the price, interest rate, up, countering any downward pressure from the increase in the money supply.

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