Long–Run Consequences of Stabilization Policies

Capital outflow is likely to increase due to foreign investments becoming relatively more attractive.

Capital inflow decreases slightly before recovering due to long-term confidence in the economy’s stability.

Capital inflow increases as lower interest rates stimulate economic growth, attracting foreign investors.

There is no change in capital flow since interest rate changes influence only domestic investment.

To decrease aggregate demand and reduce inflation

To increase government spending and reduce the deficit

To increase aggregate demand and reduce unemployment

To decrease taxes and reduce the national debt

Import quotas

Fiscal stimulus

Open market operations

Government subsidies

Decreased interest rates

Expanded unemployment benefits

Infrastructure projects launched

Increased taxes

Job vacancies decline due to overall economic expansion and higher employment levels.

There is a rapid increase in wages due to shrinking labor supply-demand signals.

Employment in high-tech sectors surges as the focus shifts to knowledge-based industries exclusively.

Unemployment rates may increase as aggregate demand reduces.

Consumers decide to save more rather than spend, leading to decreased consumption even though interest rates are lower.

Government borrowing raises interest rates so much that private sector investment is fully crowded out despite looser monetary policy.

Banks refrain from lending out money even though reserves are ample due to strict regulatory environment.

Excessive cash hoards by businesses and individuals despite low interest rates limiting additional borrowing and spending activities.

Interest rates automatically rise

The money supply decreases

Unemployment necessarily falls immediately

Aggregate demand increases

Interest rate reductions

Government spending increases

Currency devaluation

Reserve requirement changes

There is a surge in consumer borrowing due to decreased interest rates.

Consumer saving rates decline sharply as a result of increased confidence.

Consumer borrowing becomes significantly less regulated.

It becomes more expensive for consumers to borrow.

Interest rates increase, which typically decreases investment spending.

Interest rates remain unaffected while investment spending randomly fluctuates based on investor sentiments.

Interest rates decrease but have no significant impact on investment spending due to liquidity trap conditions.

Interest rates decrease, which typically increases investment spending.