Despite what many financial experts and investitures thought, the interest rate in

US has decreased substantially. Interest rate is the yearly price charged by a lender to
a borrower in order for the borrower to obtain a loan: it is usually expressed as a
percentage of the total amount loaned. Interest rates are controlled by a central bank
of particular countries with recommendation of minimum government intervention.
The interest rate may serve as a great indicator of the overall functioning of the
economy: low interest rate of the US is definitely not an indicator of a strong, vibrant
economy, quite contrary. It is rather an indicator of economic slowdown, which does
not go according to various statements from USA economists and politicians who are
arguing that economy is growing.
If FED (Central bank of America) lowers the federal funds rate, then the banks
can borrow money for less. In turn, they lower the interest rates they charge to
individual borrowers. Consequently, interest rates are then beneficial for consumers
who want to take out a loan to finance a house, car, or any other similar purchase.
Naturally, the lenders would then spend the money, which would increase the
circulation of money and may lead to increase in aggregate demand. The increase in
aggregate demand may be beneficial for the economy and the employment, but may
increase the level of inflation. The fall in interest rates might suggest that the
economic future doesnt look as bright as some of the financial press headlines have
been suggesting.

When interest rates go down from IR1 to IR2 the people would rather borrow
money from the bank than save (Graph1). Examining the graph2, we can see that
more money is being spent than normal and more goods are being demanded, shifting
AD outwards (AD to AD1). When consumers spend more, the economy grows,
naturally creating inflation, increasing prices from P to P1.

Some amount of inflation is not band for the economy. In fact, there must be
enough economic growth to keep wages up and unemployment low, but not too much
growth that it leads to dangerously high inflation. The target inflation rate is
somewhere between two and three percent per year.

The reason why the Fed is keeping the interest rates low is because they are
trying to push the unemployment from The Great Recession (2008) down.
However, it was shown that the reason behind decrease in unemployment rate well
below 7% is that many people left the possible labor force, and not so much because
of the low interest rates. The unemployment rate is the percentage of labor force
which doesnt have a job, but is actively seeking for one and is willing and able to
work.

Another, maybe better, solution to deal with the unemployment would be to

shift the focus from the Feds monetary policies toward the government and fiscal
policies, or even a strong combination of both might be beneficial in bringing postrecession unemployment down. Keynes was an advocate of the supply-side policies
and he developed most of them during the Great Depression. Even though the US
economy isnt in recession, they are still dealing with the consequences of last
recession. Fiscal policies of lowering the income tax and cutting the unemployment
benefits at the same time, might be beneficial for lowering the unemployment rate.

As the income tax decreases, individuals will have more money to spend
which will increase the AD from AD1 to AD2. The increase in aggregate demand will
bring the inflation up, but also shift the demand for workers to right from Dw1 to
Dw2, which will bring the unemployment level down. Not only will the shift in AD
increase the demand for workers, but the lower income taxes will incentive people to
take on jobs and work.
When the government is exercising their power by lowering the taxes they are
implementing expansionary fiscal policy. However, it might seem as the
expansionary effort bring only positive side effect, unfortunately they also create the
domino effect. The government will start spending faster than it can collect the tax
revenues, thus increasing the national debt. The bonds will end up competing with the
private sector, which creates the crowding out effect that brings the interest rates up.
All in all, we can argue that despite many expectations, the
interest rates have risen. The reason behind that is to fight
consequences of recession dating back to 2008. However, the lower
interest rates may bring inflation, so another solution is to
implement expansionary fiscal policies to fight employment more
efficiently.