ECONOMY

Mortgage rates and an expansionary economy



Mortgage rates and an expansionary economy

Thesis Statement

Countries face serious problems in developing a balance between mortgage rates and expanding economy at the same time.

Introduction

When we see the way in which the mortgage rates used as a tool then we can see the implementation of the policy by the Federal Reserve. If we examine this, we see that it is a policy of supply side economics in a free market economy where there is minimal government intervention. The money supply controlled by the use of mortgage rates. Spending reduced when mortgage rates increased and stimulated by mortgage rates reduced. These are monetary tools, but are not the only tools that can be used by a government; it is also worth remembering that the decision to increase or decrease mortgage rates made independent of the government by the Federal Reserve. However, the decisions made with the goals of the government in mind. There are also other, fiscal tools that are available to the government (Economagic, 2001).

Discussion

In most western nation's fiscal policy is tight, keeping the spending of the government in line with the budget available, so that there is not a deficit between government spending and income. An exception to this was the post war years, where government spending increased with the aim of maintaining full employment. Since the 1980's this policy has changed, with the government trying to reduce the amount of public money they spend.

If a government wishes to cut taxes, then it seen as common sense that they will need to cut public expenditure. Therefore, government spending not used as a tool, to increase spending in the economy and it are the monetary policies that used as manipulative economic control tools (Gavin, 2000).The situation with investments in the United States is well known. In April 2000, there was a major collapse in the IT markets on the NASDAQ, indicating that the market had been over confident, with growth rates that could not be sustained. There are many reasons to invest money, but the usual one is to increase wealth by creating growth in excess of inflation.

The low base rate has lead to lower rates of deposit savings, the opportunity cost of saving compared with making a purchase has been low, and therefore, spending has taken place, as we have seen the economy currently reliant on high levels of consumer spending (Berenson, 2001). Personal savings as a percentage of GDP are relatively low, but increasing, currently at 0.87 of GDP this by June 2001, but up on 0.84 the last quarter (Anonymous 2001). However, this is still very low, and the rates are still much lower than at any other point in the last century (Anonymous PG).

Investment is also decreasing; however the low levels of share values n some sectors will also be affecting these figures. There tends to be an increased interest in investment, in stocks and shares, when mortgage rates are low as these seen as giving a real chance of ...