Stimulus
Discuss the long-range effects of a stimulus plan as it affects the banking sector, on the one hand, and increases aggregate demand, on the other hand.
A stimulus plan by the federal government is designed to increase aggregate demand and boost economic production, lifting the nation out of a recession. By infusing money into the economy through public works projects and other government investments, newly hired workers have more income, and can thus contribute to the expansion of the economy as a whole through their spending. However, a long-range stimulus plan can occasionally make the banking sector nervous, because of fears of rising inflation. Inflation is feared by the banking sector because this reduces the value of their current holdings, and also means that current loans will yield a less profitable dividend, as prices increase and the purchasing power of the...
Additionally, most stimulus plans couple fiscal spending with lower interest rates. After the 2008 recessions, interest rates sank to virtually zero. Lower interest rates also make it difficult for banks to make money by lending money. However, consumers are far more inclined to wish to take out loans and spend, taking advantage of the low rates to buy 'big ticket items.' Low interest rates spur on consumer spending, particularly in the housing market and in automobile sales.
However, despite the understandable skittishness regarding increased rates, overall the banking sector supported the recent Obama Administration plan of lowering interest rates, even though some, more conservative economists have raised a their voices to call for an increase in rates, now that the economy appears to be more robust, despite lagging job growth. The difficulty of increasing jobs…
