The equilibrium interest rate in a country (the rate at which a balance between growth and inflation is achieved) is referred to as the neutral rate. It is generally thought that the neutral rate is composed of an inflation component and a real growth component. If inflation is targeted at 3% and the economy is expected to grow by 2%, then the neutral rate would be 5%. Exports and consumer spending are components of GDP and are thus already figured into the 2% GDP growth.

Only changes in the deficit directed by government policy will influence growth. A tax cut, which would result in lower tax receipts over the short-term, would stimulate the economy. Changes in the deficit that occur naturally over the course of the business cycle are not stimulative or restrictive. In an expanding economy, deficits will decline because tax receipts increase and disbursements to the unemployed decrease. The opposite occurs during a recession.

Both the direction of a change in interest rates and the level of interest rates are important. If, for example, rates are increased to say 4% to combat inflation but this is still low compared to the neutral rate of 6% in a country, then this rate may still be low enough to allow growth and inflation to continue.

If the government decreases the tariff on foreign goods, competition should increase, increasing economic efficiency, and the long-term growth rate. The same is true of a cut in the tax rate (i.e., the long-term growth should increase).