The Interest Rate (IR) is considered as one of the most important economic factors affecting every household, firm and government all over the world. It is, as described by Parkin et al (2005), the opportunity cost of holding money, that is, the price of borrower are willing to pay for the use of the loan. On the other hand, it is also the compensation to the risk that lenders take in lending the money. (investopedia.com, n.a. 2003) By lenders and borrowers, it refers to individuals, businesses, financial instruments and governments. IR can be also categorised into nominal IR that is the stated one on financial market and real IR that implies the return of investment in terms of value. IR is said to be an indicator of economy situation and reflection of government policy as well. Therefore fluctuations of IR would have great impact on different areas in the economy and it is crucial to understand what determines it and how it would affect the world.
This paper presents a general analysis of models of determinations s of interest rate, which are relevant to the UK economy. Thereafter, the effects of changes in IR to the economy growth will be examined. Then a conclusion will be drawn to generate the key points the paper has mentioned.
Out of all, state of economy is the fundamental parameters of IR. (Toews, 2006) when an economy experiences a growth period, IR is decreased to stimulate the amount of money circulating in the market. Conversely, IR is relatively high when a stagnation or recession occurs.
Figure 1 illustrates the relationship between real GDP which represents the economic grow and IR over 40 years in the UK. In the late 1980s the UK experiencing a huge stagnation period and from the figure the IR was hig...
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...ch are beyond the scope of the essay to discuss.
Reference:
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Parkin, M., Powell M., Matthews K, (2005). Addison-Wesley, pp 604 606
Toews, B. (n.d.). < Chapter 2 Assignment, Determination of Interest Rates>, retrieved 6 April, 2006, from http://people.wwc.edu/staff/toewbr/f441/Assignments/441%20Ch02%20Assignment.htm
Inflation occurs when consumers are spending like crazy, and “the central banks flood the system with too much money,” (DPE, 37). They do so through
In this section I will be discussing how inflation rates have increased over the past 40 years, and what effect this has had on monetary growth. Inflation rates are defined as the rate of change in price levels in our economy especially Canada. Surveys are conducted quarterly or monthly to determine and generate a Consumer Price Index. The CPI is conducted with a “basket of goods” to determine changes in consumer prices for Canadians. It is important to study and analyze the rate of inflation because it helps the government determine how the dollar value has changed over a period of time. Also to adjust pending contracts and initiate new pensions which have to take into account the effect of inflation. Less well-off people and elderly are more
Clark, Todd and Christian Garciga. "Recent Inflation Trends." Economic Trends (07482922), 14 Jan. 2016, pp. 5-11. EBSCOhost, cco.idm.oclc.org/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=112325646&site=ehost-live.
This assignment will help determine the reason and the effect the lowering of the OCR would have on promoting growth using the IS-LM model. This model will work with the policy. The proposed policy will mean the New Zealand economy will be able to move from a negative to positive state. This scenario can be used by other countries if a natural disaster strike and has the same impact like on the NZ economy. The short term impacts were minimal as only GDP were impacted which was different to the forecasts predicted. Many industries moved and relocated to different parts of NZ at a cost.
While the actual coefficients (i.e. β1 and β2) in the formula are not fixed numbers, Taylor proposed 0.5 for both as a general rule of thumb for the coefficients in his initial 1993 paper introducing the Taylor Rule. Thus, when the proposed 0.5 coefficients are adopted, if the difference between the actual and desired inflation or the actual and target GDP rises one percentage point then short-term interest rates should be increased by half of a percentage point. Because of the nature of the relationships at play in the Taylor Rule formula, many times real world events can create scenarios in which the inflation rate and real GDP may change without resulting in a change of the short-term interest rate. For every one percentage point that the real inflation rate rises, if the logarithm of real GDP were to fall by three points there would be no change in the short-term interest rate. When utilized by central banks as a rule-of-thumb for setting monetary policies, the Taylor Rule provides clear guidance for how to balance competing forces within the
The idea of the money growth rule is contingent upon the relationship between the money supply and inflation. Therefore, the question arises whether there even is a relationship between money supply and inflation. As stated earlier, one can see a relation between money and inflation. Presented above is series data that displays this relationship between money supply and the inflation rate over the previous decades. The problem is that there are fluctuations within the data and therefore a broader definition of the money supply must be utilized. Based on the research of Dr. Terry J. Fitzgerald, an economist at the Cleveland Federal Reserve Bank, if one defines money supply as M2, when examining the data over a multiple year progression, a pattern begins to present itself. Further, by graphing the difference between adjusted money growth and inflation, the link becomes evident. These graphs show the weight that changes to the money supply can have upon an economy’s inflation rate.
Inflation; ‘a situation in which prices rise in order to keep up with increased production costs… result[ing] [in] the purchasing power of money fall[ing]’ (Collin:101) is quickly becoming a problem for the government of the United Kingdom in these post-recession years. The economic recovery, essential to the wellbeing of the British economy, may be in jeopardy as inflation continues to rise, reducing the purchasing power of the public. This, in turn, reduces demand for goods and services, and could potentially plummet the UK back into recession. This essay discusses the causes of inflation, policy options available to the UK government and the Bank of England (the central bank of the UK responsible for monetary policy), and the effects they may potentially have on the UK recovery.
United States Federal Reserve. (February 11, 2014). Monetary Policy Report. Retrieved June 18, 2014, from http://www.federalreserve.gov/monetarypolicy/mpr_20140211_summary.htm
Ritter, Lawrence R., Silber, William L., Udell, Gregory F. 2000, Money, banking, and Financial Markets, 10th edn, USA.
The basic definition of an interest rate is simply the cost of borrowing money. It is the cost associated with acquiring credit, whether buying a car, getting a mortgage, or taking a vacation. Interest rate is the price paid for the use of money. It is the opportunity cost of borrowing money from a lender. It can also be seen as the return being paid to the provider of financial resources. It is an important economic price. This is because whether seen from the point of view of cost of capital or from the perspective of opportunity cost of funds, interest rate has fundamental implications for the economy either impacting on the cost of capital or influencing the availability of credit, by increasing savings (Acha&Acha
The growth was expected to gradual slow down, but con... ... middle of paper ... ... were basically led by the promise of a great profit, this false pretense helped people in high authority to be blinded by the chances of certain personal goals so they only cared about continuing their personal and collective growth without analyzing the decisions correctly and understanding the recklessly of there actions, they failed to anticipate that their selfish actions would eventually and inevitably has a severe effect on the Irish economy as a whole and for many individuals who are now jobless as a result. The recession has affected almost everyone and methods must be engaged to punish those who acted irresponsible and learn from our mistakes to protect the future economics solidity of the state. http://www.wsm.ie/c/introduction-crisis-ireland-causes-conflicts http://www.irishtimes.com/business/economy/ireland/blinkered-thinking-at-the-heart-of-ireland-s-
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.
...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.
According to the four-way equivalence model, both interest rates and inflation rates are theoretically associated with expected changes in spot rates. Your task is to review the empirical evidence relating to this assertion and determine whether these theoretical relationships have any basis in fact.
Interest rate is one of the important macroeconomic variables, which is directly related to economic growth. Generally, interest rate is considered as the cost of capital, means the price paid for the use of money for a period of time. From the point of view of a borrower, interest rate is the cost of borrowing money (borrowing rate). From a lender’s point of view, interest rate is the fee charged for lending money (lending rate). Financial theory states that movements in interest rates affect stock return by affecting the firm’s expectations about future corporate cash flows and the discount rate employed to value these cash flows and, hence the value of the firm.