Part 3/13:
Economists have long believed that lowering interest rates makes borrowing cheaper, encouraging businesses and consumers to spend and invest more. This boosts economic growth, which, in turn, lowers unemployment. However, increased activity usually results in higher inflation—as more money chases limited goods—necessitating a delicate balancing act by the Fed.
Under this paradigm, higher productivity—the efficiency with which goods and services are produced—has been a benign factor. It allows for growth without runaway inflation and can even help offset inflationary pressures. But this model assumes stability in productivity gains.