Interest rates and the effects of interest rates on the economy concern not only macroeconomists but consumers, savers, borrowers, and lenders. A country may react and change their interest rates, according to the prosperity of their economy. Interest rates, is the percentage usually on an annual basis that is paid by the borrower to the lender for a loan of money (Merriam-Webster). If banks decided not to use interest rates, it would be impossible for others to be able to take out loans and therefore, there would be far less spending money in the economy. With interest rates, this allows banks to take a percentage of the consumer’s money and loan it out to others, thus allowing economic growth to be possible. Interest rates also allow lenders to have a “safety net” which is necessary because there is a possibility that the borrower would be unable to pay back a loan to the bank. A nation’s interest rates can be raised or lowered and these shifts in interest rates correlate directly to aggregate demand. Aggregate demand, is the total demand for final goods and services in an economy at a given time (Business Dictionary). A nation uses interest rates for economic growth or to help prevent inflation. When economic growth is needed a nation would lower their interest rates. However, if a country is concerned about inflation, they may choose to raise their interest rates. When interest rates, raised or lowered, will have a negative or positive impact on consumers, and have a positive or negative impact on investors.
Much like gross domestic product (GDP) interest rates branch into nominal and real. When one is familiarizing themselves with interest rates, being able to distinguish between a nominal and a real interest rates is cruci...
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...two aspects, nominal and real, both measuring two different controls. Nominal measures what is considered a “price tag” of a loan, which includes the price of inflation. While real measures the cost of a loan without inflationary rates. From nominal and real rates there are also lowered and raised rates. When the interest rate is lowered consumer spending grows while savings decrease. Spending on items such as housing becomes one of the ways the AD rises. Though AD rises it pulls the economy out lack of spending, but puts the economy into the possibility of inflation. Differentiating from low rates, high rates stop inflation but creates the possibility of recession. High interest rates create a fall in demand for goods and services. This fall of AD puts a stop to spending, borrowing and much more, creating the incentive to save ultimately putting a haul to inflation.
When interest rates on loans are high, this leaves people with less disposable income resulting in less consumer spending. Depending on where the economy stands, this can be good or bad, as it would lead toward recession. But that may be exactly what is intended in order to decrease spending if the economy is currently experiencing over-inflation. The government may intentionally send the market into a recession rather than potentially risking too high levels of inflation. On the other hand, if the economy were already in recession this would only make the recession worse. In the situation where the economy is currently in recession, the government is instead going to change the overnight rate in order to therefore lower interest rates on loans in order to provoke consumer
the business needs to make up the costs and the only way to do this is
Generally it is well known in economics that purchasers always want to maximize their utility levels. The maximum utility is given by the formulae of max U = f(C, C’) being subject to the equation of future consumption {[Y – C](1+r) + W = C’ – Y’} . This is an important part for our assumptions since a customer would have problem determining his/her maximum utility for present as well as future consumption when faced with a certain lifetime budget constraint. The budget line represents the levels of consumption for both periods according to some factors such as present and future income as well as the interest rate level and has a slope of –(1+r ). Before considering the effects of a change in the interest rates it is important to understand the first step of the consumption model. In the diagrams A and B below, we can understand that (I) the indifference curves, act on behalf of the equal levels of utility satisfaction derived from different mixtures of present and future consumption. That being said the point (W), which is identified a...
If the interest income from these rates makes up approximately 35% of each company’s net
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
Abstract As people of many ages wish to further their education outside of high school, they tend to take out student loans in order to fulfill this wish since the large tuition payment is not in their budget. Paying for an education that presents a degree seems easy to many by taking out large loans to pay for their education. Recently, student loans have challenged the economy of Americans. Education is perceived as a necessary expense to many, in which they do not mind putting a burden on the economy for.
THE GREAT RECESSION 2007-2008 reffered to the period of decline in the world economy during the late 2000's and early 2010 which led to the collapse of the financial sector of the world's economy. The crisis began when the housing market in US went from boom to burst and a a great number of mortgage securities lost the significant value it had. Not only the US economy, but the world economy was in turmoil. The GREAT RECESSION was caused by a no. of factors, all happening simultaneously, which caused a dounturn in the economy at a global level. The primary causes included : High level of private debts in US economy.
In order to assess the current state of the economy, the examination of important economic indicators or variables has always played a vital role in the understanding of the complex economic systems we live in. The analysis of these economic variables studied by many, not only has served as a tool to evaluate the current economic performance of a country, but also has allowed experts to envisage and continue the pavement of an economy's road. Currently, some economic variables have had favorable improvements indicating a general good outlook for the economy for the following months, requiring a further individual analysis and comparisons in order to foresee crisis or successes.
One might know that time is one of the most valuable assets in our lives. In the financial world the value of money is linked to time, primarily because investors expect progressive returns on their cash over periods of time, and they always compare the return from certain investments with the going or average returns in the market. Inflation on other hand erodes the purchasing power of money causing future value of one dollar to be less than the present value of a dollar. This paper will examine time value of money and the applications that determine successes or failures. An examination of the different vehicles that can be used to generate financial security for corporations and individuals will be provided. After defining the applications that generalize time value of money, an explanation will be offered regarding the components of interest rates by expanding on the concept that interest rate equates the future value of money with present value.
As a result of this economic growth families will begin to feel more confident and will begin to spend more of their money instead of saving it because they believe that will receive a pay raise or will find a better job. (Amadeo, 2016) Borrowing also increases when economic activity is high people begin to borrow from banks and other places because they feel that the government has been doing a great job managing the economy. (Amadeo, 2016) As we have seen in 2008 people should never get to confident in the economy because our economic bubbles are used to crashing when they are doing very well and it’s never really the people’s fault it’s the governments. Although inflation begins to rise when the economy is doing great one of the things that is known to bring prices down is competition among businesses. Competition is great because one company will attempt to sell a product for a cheaper price than another company which results in lower prices the same as you see with cell phones and automobiles. Higher prices can also be caused by technological innovations when people are expecting a new product the producer can sell it for a higher price because they know that consumers will spend almost any amont of money to obtain that product. (Amadeo, 2016) Higher demand for new products will increase employment to meet those demands and inflation will rise which will benefit the economy tremendously. Whenever the price level increases, spending must also increase to be able to buy the same amount of goods and
In an economy, aggregate demand (AD) accounts for the total expenditure on goods and services. It has five constituents; Consumer expenditure (C), Investment expenditure (I), Government expenditure (G), Export expenditure (X) and import expenditure (M), This gives us: AD= C+I+G+X-M. Aggregate supply (AS) on the other hand is the total supply of goods and services in the economy. Increasing AD and decreasing AS both cause demand-pull and cost-push inflation respectively. Demand pull inflation occurs when aggregate demand (AD) continuously rises, detailed in Figure 1. The AD curve continuously shifts to the right, as demand continuously increases, from point a to b to c. This consequently causes an increase in the price level of goods and services. As prices rise, costs of production also increase, causing producers to reduce output (a decrease in aggregate supply (AS)), shifting the AS curve to the left and leading to yet another increase in prices, (t...
There are many factors that affect the economy, inflation is one of them. Basically inflation is risingin priceof general goods and services above a period.As we see value of money is not valuable for the next years due to inflation. Today every country has facing inflationary condition in their economy.GDP deflator is a basictool that tells the price level of final goods and services domestically produced in an economy.GDP is stand for gross domestic product final value of goods and services, Furthermore GDP deflator shows that how much a change in the base year's GDP relies upon changes in the price level. . Inflation in contrast, how speedy the average prices intensity is increases or changes above the period so the inflation rate define the annual percentage rate changes in the level of price is as measure by GDP deflator more over GDP deflator has a advantage on consumer price index because it isn’t only based on a fixed basket of goods and services. It’s a most effective inflation tool to identify the changes in consumer consumption and newly produced goods and service are reflected by this deflator. Consumer price index (CPI) is also measure the adjusting the economic data it can also be eliminate the effects of inflation, through dividing a nominal quantity by price index to state the real quantity in term.
Inflation is the rate at which the purchasing power of currency is falling, consequently, the general level of prices for goods and services is rising. Central banks endeavor to point of confinement inflation, and maintain a strategic distance from collapse i.e. deflation, with a specific end goal to keep the economy running smoothly.
Inflation is one of the most important economic issues in the world. It can be defined as the price of goods and services rising over monthly or yearly. Inflation leads to a decline in the value of money, it means that we cannot buy something at a price that same as before. This situation will increase our cost of living.
"Interest is the cost of borrowing money. An interest rate is the cost stated as a percent of the amount borrowed per period of time, usually one year" (Getobjects.com, 2004). An interest rate is a very important factor in all financial decisions. The two types of interest rates are simple and compound (Brealey, Myers & Marcus, 2003). A simple interest rate for example, occurs when a person borrows money from a lender and he or she will have to pay the lender a fee, this fee is the simple interest rate (Brealey, Myers & Marcus, 2003). Simple interest is normally used for a single period of less than a year, such as 30 or 60 days [simple interest = p x i x n] (Getobjects.com, 2004). For examp...