Question

The Federal Reserve has kept interest rates low to encourage borrowing. Why have consumers not spent more money despite low interest rates?

Answer 1

In order to increase the money supply, Federal Reserve fall the interest rate to low level. With decrease in interest rate, cost of borrowing decreases and people borrow more from the banks. With increase in income, due to low interest rate , people do not keep money in bank saving accounts but at the same time consumers not more spent. the reason is that consumers are rational .they know the importance of investment. Interest rate and investment are inversely related. With decrease in interest rate , investment will increase . Consumers therefore gives preference to investment in housing , real estate rather than consumption at low interest rate.