<p>There are many channels of monetary policy transmission. You could look that up more if you're interested. I'll point out some of them here.</p>

<ul>
<li><strong>Interest rate channel.</strong> This is pretty much what you mentioned in the question. The opportunity costs of borrowing money becomes cheaper, so private demand expands.</li>
<li><strong>Asset price channel.</strong> With the lower rate, people find it more attractive to invest in other assets (as opposed to keeping money in the bank). The increased asset demand leads to an increase in equilibrium price, which increase wealth for those who are holding those assets, and more consumption due to the wealth effect.</li>
<li><strong>Exchange rate channel.</strong> The lower interest rate would cause funds to flow out of the country (people searching for higher yield in other countries) causing the currency to depreciate. The depreciated currency helps exporters to be able to compete and export more.</li>
</ul>

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2019-11-28T12:53:04.530Z
The last two sound like effects that hurt the economy overall but improve certain metrics. Am I missing something?
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2019-11-28T15:09:42.877Z
@Art why do so private demand expands?
jennifer ruurs
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2019-11-29T03:50:10.780Z
@user253751 Regarding FX, t would lead to a fall in export prices (see [here](https://www.economicsonline.co.uk/Global_economics/Policies_for_stability_and_growth.html)).
Art
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2019-11-29T03:51:01.243Z
@jenniferruurs If you had an investment that would give you 3% return, you wouldn't take a loan that you have to pay 5% interest rate on it... but if the interest rate drops to 2%, then that investment becomes attractive.
Art
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2019-11-29T11:17:55.030Z
@Art I don't really see how exporters exporting more improves the economy for people in the country though. At best, the increased exports would cause more money to flow back in, cancelling out the effect? And at worst, they just have less stuff.
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2019-11-29T12:25:46.247Z
@user253751 On the very basic level, exporting uses domestic resources. Being able to export more leads to higher employment, higher purchase of intermediate goods, etc. Also, exports is a component of GDP, a measure of a country's income.
Art
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2019-11-29T12:29:03.543Z
@Art You seem to be treating exports or jobs or intermediate purchases as a thing that should be maximized, hence my confusion. Surely the thing that people should aim to maximize is "quality of life within the country."
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2019-11-29T12:30:44.900Z
@user253751 Please see, for example, [this](https://www.investopedia.com/ask/answers/060115/how-does-gross-domestic-product-gdp-affect-standard-living.asp).
Art
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2019-11-29T12:35:28.150Z
This link does not explain how GDP affects standard of living. You could make the case that by having people do more work *now* (which does not affect them but benefits people in other countries) they create an obligation for people in other countries to do work for them later (via the mechanism of current accounts, etc). That would make sense.
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2019-11-29T13:20:29.917Z
This is getting long and I think it's a great question. Perhaps you could post it as a separate question?
Art
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2019-11-28T10:29:47.293Z
2019-11-28T10:29:47.293Z
Art
<p>Central banks decrease sometimes the interest rate by saying this has positive effect on the economy and the development of countries.</p>

<p>One of the reasons is that it can be easier to do investments (business, government, etc.). Are there other reasons? And does somebody have deeper insights about doing this and the benefit of it?</p>

<p>(Of course there are also disadvantages and risk of doing this (but I am not interested in that for now)) </p>

<interest-rate><central-banking>
Decreasing interest rate effect on economy
jennifer ruurs
# Decreasing interest rate effect on economy

(Asked by: username_0 on 2019-11-27)

Central banks decrease sometimes the interest rate by saying this has positive effect on the economy and the development of countries.

One of the reasons is that it can be easier to do investments (business, government, etc.). Are there other reasons? And does somebody have deeper insights about doing this and the benefit of it?

(Of course there are also disadvantages and risk of doing this (but I am not interested in that for now))

**Tags:** interest-rate, central-banking


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## 1 answers

### Answer by username_1 on 2019-11-28. Score: 2 | Accepted answer

There are many channels of monetary policy transmission. You could look that up more if you're interested. I'll point out some of them here.

* **Interest rate channel.** This is pretty much what you mentioned in the question. The opportunity costs of borrowing money becomes cheaper, so private demand expands.
* **Asset price channel.** With the lower rate, people find it more attractive to invest in other assets (as opposed to keeping money in the bank). The increased asset demand leads to an increase in equilibrium price, which increase wealth for those who are holding those assets, and more consumption due to the wealth effect.
* **Exchange rate channel.** The lower interest rate would cause funds to flow out of the country (people searching for higher yield in other countries) causing the currency to depreciate. The depreciated currency helps exporters to be able to compete and export more.

> **Comments:**
> **username_2**: The last two sound like effects that hurt the economy overall but improve certain metrics. Am I missing something?  
> **username_0**: @username_1 why do so private demand expands?  
> **username_1**: @user253751 Regarding FX, t would lead to a fall in export prices (see [here](https://www.economicsonline.co.uk/Global_economics/Policies_for_stability_and_growth.html)).  
> **username_1**: @jenniferruurs If you had an investment that would give you 3% return, you wouldn't take a loan that you have to pay 5% interest rate on it... but if the interest rate drops to 2%, then that investment becomes attractive.  
> **username_2**: @username_1 I don't really see how exporters exporting more improves the economy for people in the country though. At best, the increased exports would cause more money to flow back in, cancelling out the effect? And at worst, they just have less stuff.  
> **username_1**: @user253751 On the very basic level, exporting uses domestic resources. Being able to export more leads to higher employment, higher purchase of intermediate goods, etc. Also, exports is a component of GDP, a measure of a country's income.  
> **username_2**: @username_1 You seem to be treating exports or jobs or intermediate purchases as a thing that should be maximized, hence my confusion. Surely the thing that people should aim to maximize is "quality of life within the country."  
> **username_1**: @user253751 Please see, for example, [this](https://www.investopedia.com/ask/answers/060115/how-does-gross-domestic-product-gdp-affect-standard-living.asp).  
> **username_2**: This link does not explain how GDP affects standard of living. You could make the case that by having people do more work *now* (which does not affect them but benefits people in other countries) they create an obligation for people in other countries to do work for them later (via the mechanism of current accounts, etc). That would make sense.  
> **username_1**: This is getting long and I think it's a great question. Perhaps you could post it as a separate question?  

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