What is the top ten things that a person should know about how the interest rate effects the economy?

Question

i am interested in this stuff.

Answer 1

Lower interest rates tend to encourage investment and consumption by both businesses and consumers. However, they also tend to cause inflation, which hurts the US dollar.

Answer 2

It's a good question. I can see that Elemental has taken economics before. I don't think I can name 10 things.

To elaborate on what has been said:

Since the interest rate affects savings and investment, it affects the growth rate of the economy. That's why investment is so important, especially for a poor country. But without any savings, there is no money for investment (obviously).

The interest rate is interconnected with several other variables within the economy such as the exchange rate, the trade balance, inflation rate, and unemployment rate.

In a nutshell, the interest rate is a tool used by the country's bank to keep the economy stable.

If you are really interested, you should study macroeconomics.

Answer 3

The interest rates and the way the economy is doing are very much interrelated. If the exonomy is doing well and the number of employment and people working in labour forces increases the number of interest rates which are decided by financial institutions, increases as well. When there are more money circulating and people are happy , the rate of interest rate goes up, some times when the risks are high, the interest rate can also increases. But Not all countries will follow the same basic rules I guess, I am not sure.

Answer 4

There is essentinally one thing which changes in the interest rates affects the economy which in turn has massive implications for the whole economy (depending on what theory you belive)

1. The cost of investment and saving.

Take a interest rate increase and look at savings. If the interest rate increased you would be inclined to save more. Now this may not have much affect on most people as quater percent cahnges fon't mean much but for people who make their money with this stuff its very important. To explain how this affects the economy it is best to look at a few equations. Suppose you have a fixed income (Y) and you could either spend your money (consume C) or save it (s) as you can either spend or save Y = C + S so if there is an increase in the interest rate people would save more and spend less. If we look at investment, an increase in interest rates people would borrow less as the cost of borrowing is higher, this leads to less investment as projects become unprofitable. So an increased interest rate leads to reduced demand and investment this is used to cool economies down to stop them overheating and keep interest rates down

Answer 5

The single most important thing is the term structure (the difference between long and short term rates), It is a good predictor of future GDP growth rates. Since the Fed sets short rates and most loans are long term, it is a measure of the effect fed policy is having on borrowing. Currently the long rates are lower that short which indicates a coming economic slow down.

Answer 6

low interest rates stimulate the economy. interest rates are lowest in bad times like during recessions.

high interest rates slow down the economy. interest rates are usually highest in boom times.

the prime rate is set by the Chairman of the Federal Reserve. Alan Greenspan was the chairman for years. we have a new one now, i cant think of his name.

the prime rate affects borrowing by businesses and individuals, inflation, and many other things.