By setting the federal funds rate, the Fed indirectly adjusts long-term interest rates, which increases investment spending and eventually affects employment, output and inflation.
A decrease in interest rates lowers the cost of borrowing, which encourages businesses to increase investment spending.
What are the benefits of increased investment?
Benefits relate to the effects of investment in terms of increased value added, reduced costs, larger production, higher competitiveness. Hence, profits are expected to be higher, too. The value over time of these benefits (and profits in particular) are compared to the investment costs.
What factors would result in higher investment?
Summary – Investment levels are influenced by:
Interest rates (the cost of borrowing) Economic growth (changes in demand) Confidence/expectations. Technological developments (productivity of capital)
What increases investment demand?
Investment demand may increase either due to (a) technological innovation (b) decrease in personal income taxes (for those who invest in new capital). As saving that is, the supply of loanable funds is fixed, an increase in investment implies that the demand for loanable funds will increase.
What happens when you lower interest rates?
The Fed lowers interest rates in order to stimulate economic growth, as lower financing costs can encourage borrowing and investing. When there is too much growth, the Fed can then raise interest rates in order to slow inflation and return growth to more sustainable levels.