The study of interest is very important and fundamental to the understanding of the economy of a country.?

Question

Discuss the importance of misunderstanding interest and how it relates in our daily life.

Answer 1

Consider the role of the American Federal Reserve. It helps steer the US economy by two general means. One by holding or selling the federal government's debt. Another by charging interest on loans to banks who need a bit more liquidity. In the first case, by buying up federal debt, that puts more money into circulation, or by selling federal debt, that takes more money out of circulation. Similarly, for the interest they charge. Lower interest rates allow the banks to use the Fed's money more easily. Like with the debt, there is more money in circulation, or less if they raise the rates. The interest rate has something more, it becomes an example that banks use to raise or lower their rates to customers. In the interest rate changes, it changes the velocity of money, how fast money changes hands, putting it back into play. The debt holdings manipulates how much money there is, or isn't.

Many countries don't have the same kind of monetary control. Some countries go through wild swings of inflation and deflation. Interest is like an oar in the water, it steers and applies drag to the progress of the boat. Still, the issue is what the people of the economy make or buy. Interest rates are important, but merely icing on the cake. If the economy is producing fewer goods, like the US after dismantling our industrial capacity in favor of cheaper foreign goods. If the economy is buying more goods than they purchase, then there will eventually come a time when the purse runs empty. These are the fundamentally important things. Interest rates help determine the speed at which they empty the purse as they borrow in order to buy more.

It is important. It is a useful indicator. It is not the full story, or possibly not even the most important part of the story.