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How does lowering interest rates reduce the federal deficit?
This is part of a question from the 1990 AP Macroeconomics Exam. I got the right answer, but I still don't understand how this works. Can someone please help me clear this up.
Here's my line of thought, but I'm not sure it it's right:
-lowering interest rates will cause companies to borrow and invest more
-these investments will lead to more products, and thus, profit for the companies
-with more profits, the companies will be forced to pay more taxes to the government
-thus, the government will had more tax revenues, which will reduce the federal deficit?
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