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Economic Scenarios
Higher interest rates, more capital invested
During the 1980s, when President Reagan was attempting to stimulate the economy, he radically lowered taxes. The U.S. was in the grips of 'stagflation,' or high unemployment and high inflation, a combination which historically is not supposed to occur together. The lower corporate taxes and lower taxes for wealthy individuals eventually encouraged more investment in business. "The Fed was resolved to stop inflation…[and] kept raising rates in 1980 and '81, eventually bringing both the economy and inflation to a standstill" (Solomon 2009). By the mid-80s, interest rates were still high, but investment capital in the economy had increased.
Lower interest rates, less capital invested
Low interest rates and low rates of capital invested in the economy are usually characteristic of a recession. This occurred very recently, during the Great Recession of 2008, when the Fed slashed interest rates to historically low levels...
"The Federal Reserve surprised Wall Street…by cutting its fed funds short-term interest rate target by three-quarters of a percentage point…The move had the effect of reducing rates on mortgages and home equity loans, and reassured investors that the Fed will do what it can to spur economic activity as long as the threat of recession looms" (Barr 2008). However, despite this encouragement to banks to lend money, there has been a widespread reluctance amongst many businesses to expand and hire more workers.
Lower interest rates, more capital invested
In the 1990s interest rates were much lower than they had been in the 1980s, but the economy was booming and more capital was being invested in the economy, partially as a result of the revolution in technology that came to be known as the dot.com boom (and bust). After the economic bubble began to deflate in 2001, the Fed lowered interest rates so much that a housing 'bubble' manifested, and more and more people…
References
Barr, Colin. (2008). The darker side of interest rate cuts. CNN. Retrieved:
http://money.cnn.com/2008/01/24/news/economy/barr_interest.fortune/
Solomon, Paul. (2009). What led to the high interest rates of the 1980s. PBS.
http://www.pbs.org/newshour/businessdesk/2009/05/what-led-to-the-high-interest.html
of Economics. Retrieved: http://www.econlib.org/library/Enc/FederalReserveSystem.html
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