How does interest rates affect the econony?
Answer:
Lower interest rates make it easier for people to borrow in order to buy cars and homes. Purchases of homes, in turn, increase the demand for other items, such as furniture and appliances, thus providing an additional boost to the economy.
Lower interest rates mean that consumers spend less on interest costs, leaving them with more of their income to spend on goods and services.
Lower interest rates make it easier for farmers, manufacturers, and other businesses to borrow to invest in equipment, inventories, and buildings. Also, the returns that investments will produce in future years are worth more today when rates are low than when rates are high. That gives business more of an incentive to invest when rates are low. Increased business investment, in turn, makes the economy grow faster, as productivity, or output per worker, increases faster.
Interest rates do not seem to affect the amount that people save. That’s because higher interest rates have two conflicting effects on how much people save. First, the higher return that savings can earn gives people an incentive to save more. Second, however, the higher return makes savers feel richer, so they may spend more, rather than save more.
higher interest rates makes lending to that country more desirable. also, higher interest rates tends to slow growth and keep inflation in check.
Depends on the type of economy.
If it is a closed economy, then the interest rate is what effects savings/consumption decisions.
If it is a small open economy; then the interest rate doesn't affect anything, because the country has to take whatever the global rate is.
Small large economy; changing interest rates can adjust savings/investment/trade surplus&deficit/exchange rate decisions.
A simple way of looking at things is to consider the cycle of effect that the change in interest rates will have. An increase in interest rates will mean borrowing from the bank becomes more expensive. Therefore people will find it harder to pay back loans; and as a result people in the economy have less disposable income.
A decrease in interest rates results in loans becoming cheaper to pay back and more people borrow money. Therefore people are spending more and we see economic growth.
There is a different school of thought. Interest rates may not be a cause bye an effect of the economic situations.
To understand this, we need to see the reason for the existence of interest rates. Humans, by nature are selfish. They would like to keep all their wealth to themselves. If they had to lend that wealth to someone else, they would that only if they are well compensated for that act, or if that can lead to much more higher amount of wealth in the shortest possible time. Things such as risk, inflation, interest rate, etc are some of the measures on how quickly the owners want their money back, and how much more of it they want back.
Now, looking from that perspective, economy effects the interest rates. Not the other way. Eventhough we usually say that FED is changing the interest rate, that is not really true. Federal Reserve is most of the time catching up to the facts of the economy and "identifying" where the economy is placing the interest rate to be.
While this is a different way of looking at it, this hypothesis can explain a lot of things. Especially why the interest rates are different in different parts of the world at different times.
This is worth pondering !!
The answers post by the user, for information only, FunQA.com does not guarantee the right.
More Questions and Answers:
More Questions and Answers: