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What role do interest rates play in the implementation of fiscal policy?

Cheyanne Ransome

Interest rates are a big part of a thing called fiscal policy. Fiscal policy is like a plan that the government makes to help the country's economy. The government wants to make sure that the economy is doing well and that people have jobs and can afford to buy things.

Now, interest rates are like a price that people have to pay when they borrow money from the bank. Let's say your friend asks to borrow $10 from you. You might say, "Sure, but you have to pay me back $11," because you want 10% interest. The bank does the same thing when it lends money to people or businesses. Sometimes the interest rate will be high, like 10%, and sometimes it will be low, like 3%.

When governments make fiscal policy, they sometimes use interest rates to help the economy. Here's how it works: if the economy is not doing so well and people are not buying a lot of things, the government might lower interest rates. When interest rates are low, people and businesses are more likely to borrow money from the bank, because it's cheaper. They might use that money to buy things, like a fancy car or a new house. When people buy more things, businesses make more money, and the economy does better.

On the other hand, if the economy is doing really well and people are buying a lot of things, the government might want to slow it down a bit. They might raise interest rates to make it more expensive to borrow money. If it's more expensive to borrow money, people and businesses might not want to do it as much. Then, they might not buy as many things, and the economy won't grow as fast.

So, interest rates are like a tool that the government can use to help the economy. They can make them higher or lower to try and keep things running smoothly. If you ever hear someone talking about interest rates and fiscal policy, now you know what they mean!