Why would spending in the 2007 Federal budget force RBA interest rates to rise before the 2007 Feder election/

Question

I just need information to why increased government spending will increase interest rates and how this would affect the Australian economy. I know that the Federal Budget was mildly expansionary this year but how would this increase in spending lead to an increase in interest rates before the 2007 Federal election (i know an interest rate rise has already occurred but why did it occur)

Thank you

Answer 1

Government spending is not directly related to interest rates. Government spending can be used to revive a failing economy, which in turn puts pressure on available credit, causing interest rate rises. However our economy is strong and the government is in surplus, so credit is totally unaffected by government spending. If anything the rate would fall because demand is low.

Interest rates are rising because of the private sector's massive debts. Plus some mortgages are failing and this is also putting pressure on credit/interest rates. However the strength of the economy is expected to stabilse rates.

Answer 2

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