In an open economy model,what'll happen attempt to stimulate the domestic economy by lowering interest rates?

Question

reducing demand for domestic investment by foreigners?
increasing foreign demand for domestic investment?
stimulating domestic investors in foreign assets to reinvest at home?

Answer 1

It variable lowering interest rates makes borrwing cheaper for the average comsumer, and it means cheaper payments on loans. Lower interest rates are used to stimulate economic activity, and borrowing of captial.
Also, too low of interest could spark inflation and reckless borrowing, erode the purchasing power of the comsumer, make it more expense to borrow. Its a balancing act to make sure to keep inflation in check, and manage resonable growth in the economy. It brings efficent use of borrowing with wise fiscal discisions made by central bank.

Answer 2

A classic question.
Right now what comes to my mind is the following:
Reducing interest rates means:

- Lower the stimuli to keep money in banks => more money in the economy to be invested or spent by locals => stimulated demand for goods and services => higher domestic production, exports and imports => higher growth rate
- Increase the foreigners' desire to use local capital if they want to develop businesses in our country, because it will become cheaper
- Could lead to "overheating" the local economy if it results in too much money in it, compared to the real production => inflation
- Lowering interest rates results in making locally produced goods cheaper on the world market => normally exports must go higher => if so, foreign residents will need more of our country's currency to buy goods from us => our currency will gradually become more expensive => in the long run this would again result in lower demands for our goods abroad
- Overall, it will have an expansionist effect on the local economy, which should bring also new foreign investment to the country

Net effect of all will depend on the magnitude of each of the variables - demand vs. supply, imports vs. exports, foreign vs. domestic investments, value of all products and services vs. the whole amount of money in the economy, etc.

Answer 3

Interest rates in general are set by the Federal Reserve in the US. This rate is set in view of things like consumer spending, house prices, employment etc as well as inflation. Credit card companies set their own rates (hence a vast range of rates for different companies), which often varies based on the rate set by the Fed. At the moment the US economy looks like it might be going into recession, and so lowering interest rates to help increase consumer spending and boosting the economy looks like it might be done to help the economy. This in turn may go hand in hand with lowering of credit card interest rates, but an decrease too low will cause increased debt (which isnt a good thing if too much!)

Answer 4

If it is a small open economy, all of the previous answers are incorrect.

This is because in that model, interest rate is r*, or the world interest rate. In a small open economy, the economy must TAKE the world interest rate and cannot change it.

In that case, if you lower your interest rate below the world interest rate, investors will borrow money from you and invest abroad, meaning that your interest rate will rise as borrowings outpace deposits.

Answer 5

I don't know what that means but i think it might be bad for our economy and job openings.