Tuesday 17 March 2009

Note 7- Interest rate

Interest rate is the charge by the bank when borrowing money and the money paid to you when saving money as a reward. It is made by the central bank of a country according to different stages of economy and the economic performance.

Therefore,we can know that interest rate is a tool in monetary policy to affect the economic objectives through influencing the investment and consumption.
But why does the interest rate play a considerably important role in the market?
1)It will affect exchange rate in the same direction like that as interest rate goes down,the confidence from overseas to the country will be redcued which resulting to the decreasing power of the currency. Then the exchange rate can affect the balance of payments.
2) It will increase the money supply in the bank to operate the bank better or borrow debts.
3) Inflation can be reduced by increasing interest rate resulting to less consumption and demand.
4) Unemployment can be reduced as a result of an increasing demand resulting from the increasing interest rate.
5) More investment and export as injections in the economy will lead to economic growth by a decline in interest rate.

However,interest rate is determined by the central bank and it's limited for the bank to change the figure. Besides,even if the interest rate is low,people have to take a time to consider to increase consumption or not. What's more, if it is in a recession,the low interest rate can't encourage consumers to consume more.
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4 comments:

  1. ruobing17 March 2009 at 19:46

    Daisy,can you explain why the bank of england has reduced the IR to 0.5%,but it doesn`t really cause a increasing in aggregate demand?

    ReplyDelete
  2. ruobing17 March 2009 at 19:58

    one more thing,as you said demand will increase if the interest rate goes up..and the unemployment also can reduced...I`m confused,
    if IR goes up,people aren`t likely to expend more than before,so why demand will increase.and if IR increases,company will fire workers in order to keep profit...so?

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  3. Daisy18 March 2009 at 05:40

    Firstly,I'm sorry about that i made a mistake.Demand will increase as interest rate goes down.
    Then,now the Uk is suffering a recession and people don't have confidence to go on consuming. Therefore,even though the interest rate is reduced,people will not consume more.

    ReplyDelete
  4. ruobing18 March 2009 at 14:39

    thanks!hahahaha!

    ReplyDelete

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