According to the principles of micro economic theory (which does not take Into account aggregate, or national demand, but only considers particular spheres of demand in the national economy) as prices decrease, average consumer demand will increase.
For example: Oranges?60 cents/Average Consumer Demand=2 Oranges?40 cents/Average Consumer Demand=4 Eventually, even if individuals have less money to spend due to a rising national unemployment rate, micro economic theory suggests that producers will have to rice their goods so cheaply, that demand, production, and thus employment will all Increase. However, this has not always proved the case, as when one’s personal employment seems uncertain, consumers are apt to hoard their savings. This is a wise personal or micro economic decision, but is unwise for the national economy as a whole.
This means that production, no matter how low producers set prices, is never stimulated by a corresponding rise In demand. Goods pile up, and more workers are laid off. The solution to this problem of consumer hoarding is to increase overspent spending, ideally in economic sectors that private industry is unlikely to explore, so as not to overlap into the areas of development that the newly stimulated economy will wish to hire new workers. However, according to the article on government spending In Monochrome. Mom’s archives, many libertarian economists still dispute this Keynesian solution to spend at a deficit, to temporarily stimulate 1 OFF however conservative economists who suggest tax cuts as a remedy, especially cuts that favor wealthy investors do not always stimulate additional spending of the given venue, as the cuts may merely stimulate more hoarding amongst ordinary consumers, or stimulate long-term investment on the part of wealthy entrepreneurs rather than the needed short-term stimulating consumption to fuel production.
Other tools for the government to stimulate economic growth lie in the hands of the Federal Reserve. The Federal Reserve can lower interest rates, to encourage consumption and borrowing, rather than saving. Conversely, the Federal Reserve often lowers the interest rate when there is a need to curtail inflation or economic expansion that is happening too quickly and pushing prices too high, beyond the growth of real wages.
Monetary policy, in addition to tax cuts and government spending is yet another tool that the federal government can use to balance the excesses of the American free market economy, although neither liberal, Keynesian, conservative, or libertarian economics have found a perfect formula or singular tool that will ‘work’ every time. References rent spending diagram.