I know that in economic models it’s easy to explain, but in real life how does it work? How do buying bonds and lowering interest rates actually cause more people to have jobs? What is the chain reaction?
In: Economics
By lowering interest rates, we make it cheaper for companies to borrow. The cheaper it is for a company to borrow, the more investing (via borrowing, buying hardware, hiring people, and paying back the debt in the long term) the company can do, and the more widgets the company can make and sell.
Cheap *short-term* borrowing is really important for big businesses, because it’s usually easier and cheaper to borrow overnight than to keep oodles of cash lying around. Ask me about the 2008 recession and GE Credit if you want a horror story. Again, cheaper loans = more investment = more jobs.
Meanwhile, if I want to buy a house or a car, it’s cheaper for me when interest rates are lower. The cheaper it is for me to borrow money, the more likely I am to buy a car/house. This also applies to credit card purchases of luxury goods (laptops, TVs, etc.). In turn, when I buy lore stuff, I increase demand for stuff, and that causes suppliers to increase output or allow the price to rise (more profits, in theory).
I’m not sure about bonds.
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