Final answer:
Decreasing interest rates is intended to stimulate the economy by lowering the cost of borrowing, which encourages spending and investment, potentially increasing production and employment. However, it can also lead to inflation if not managed carefully.
Step-by-step explanation:
When the Federal Reserve decreases interest rates, it often does so with the intent to stimulate the economy. Lower interest rates reduce the cost of borrowing, which in turn encourages banks, businesses, and consumers to take out loans and spend more. This increase in spending can lead to greater demand for goods and services, potentially speeding up economic activity and increasing production. As more money circulates through the economy, we may see a rise in employment and an increase in the Gross Domestic Product (GDP).
However, there is also a risk that an excessively loose monetary policy, with persistently low interest rates, can lead to inflation. More money chasing the same amount of goods can drive up prices. If interest rates are too low, it may also encourage excess risk-taking in the financial markets, as seen in the lead-up to the 2008 Financial Crisis. Therefore, while the primary goal of reducing interest rates is to boost economic activity, it needs to be balanced to avoid unintended negative consequences like high inflation.