A fall in interest rate has also relieved those people who currently have mortgage payments as they are the mostly affected by interest rate changes; thus, a fall in interest rate will lead to increased consumption as those consumers will save more money on mortgages to spend on other goods and services.
The new low interest rate is expected to lead to increased investment- the additional of capital stock to the economy by firms), as it’s cheaper to borrow money. Increased investment could also be encouraged by
Fig 1
A decrease in interest rate will boost investment.
A decrease in interest from 7% as in 1990 to 3.5% currently will lead to an increase in borrowing and thus an increase in the level of investment from I1 to I2
A fall in interest rates is also expected to discourage the incentive of saving as people gain less in return, this will lead increased consumption as consumers spend more on durable goods and services. Increase consumption in the economy is likely to encourage firms increase their output to respond to increased consumption. As firms invest more in order to increase real output, new job opportunities will be created for the people.
As more people are employed, there will be an improvement in the incomes of the Polish population and this will thus lead to increased consumption. An increase in real output and consumption in the polish economy will be a big boost to Poland’s aggregate demand and hence; the aggregate demand curve will shift to the left.
Fig 2 Increased consumption and investment will add to the aggregate demand of Poland
A shift in the aggregate demand curve from AD0 to AD1 as an effect of the government’s monetary policy will act as a sign of economic growth- an increase in national income), and increased job opportunities which were the government’s main aims in enforcing the monetary policy.
As a matter of fact, a decrease in the interest rate will make the zloty- Polish currency) cheaper. This will boost Poland’s exports as it will be cheaper for other nations to buy her goods and services. This will make Polish goods more competitive hence, decreasing imports and increasing exports which will add aggregate demand to her economy.
Increased consumption and investment will contribute to Poland’s actual output growth, as there will be new jobs hence improving the incomes of the population. Increased employment and investment will be a sign of economic growth.
Fig 3
Actual growth will as a result of increased consumption and Investment in the economy
The improvement of production from point A in the PPF to point C on the PPF would increase Poland’s actual output. This will be a sign of increased national output and a decrease in unemployment level or to say economic growth.
A fall in interest rate will also relieve the government itself, since governments pay large amounts of money yearly on their own national debts. Therefore, low interest rate will decrease the cost of government payments which could lead to lower taxes in the long run / in the future.
