shagsthedog06 said:
Why do interest rates fall when fiscal policy is tightened? and how does that make domestic funds more easily available for investment and improvem business confidence??
please help
When Fiscal Policy is tightened that means (G<T), meaning there is lower government expenditure and higher taxation. With higher taxation, it has the effect of lowering individual and business spending. Therefore, the RBA can lower interest rates because spending has reduced and subsequently inflation is more controlled.
Its important you understand that the RBA is independent of the government and just because there is contractioary fiscal policy does not mean that the RBA will lower interest rates. They do so on their on terms, in accordance with the Australia economic status.
Domestic funds are more easily available due to increase in taxation. This builds stronger national savings meaning investors can access these funds and not be 'crowded out' (although this term is normally in conjunction with a budget deficit, whereby government expenditure has exceeded to a point more national savings are low and subsequently the demand for money is higher...meaning increase in interest rates).
Business confidence is improved because with less government expenditure, businesses can start investing in capital more without feeling threatened by competition with the government. (I think your question is a bit too ambiguous because your asking four questions at once which leads to different answers, depending on perspective. For example, I could say that business confidence isn't improved because of lower interest rates. With lower interest rates business investors won't gain as high a return. On the other hand, lower interest rates can also mean that business investors don't have to pay higher interest rates, so they're willing to invest more, create more capital and consequently improve economic growth in the long term.)
I hope that helps. Good luck.
