How Interest Rates Affect The Economy

When it comes to matters associated to the economy, myriad factors can be accountable to its success and downfall. One of these factors is the interest rate. Typically, people seemed not convinced to get loans from the bank due to the fact that they find it difficult to pay back alongside the decreased number of home and car purchases.

It notes the benefits acquired by consumers from the effects of lower interest rates on the economy. Just take for instance the bank loan taken by the people to pay their car of house. This would be the case when the interest rates are low. On the other side of the coin, the price of these items decreases so that more and more people can have the opportunity to pay for what they have purchased. This happens when their market is strong. This also affects the investors perceiving less risk in getting a loan and in investing it in something else mainly because they will be required to pay back their lender in lesser amount.

People tend to have more disposable income for use on things they want to acquire in times when they do not have enough sum to pay the bank. This could be more than enough to stimulate the global market with low interest rates. On the other hand, lenders are not benefited from low interest rates as they are able to accrue this to the deposited money in the bank to maintain the stability of the profit. However, interest rates have no effect on the real savings of the people mainly because a disposable income’s increased amount suggests their likeliness to spend it more than to save it.

Take note the possible increase of foreign investment as people overseas prefer to receive larger return of their investment and get it at higher interest rates when they are strong. As a consequence, this scenario heightens demand for dollar, which increases its value in the international marketplace. Decreased interest rates, however, occurs when the opposite happens.

Survey suggests that lower rates are good for the stock market, making other investments not that encouraging and attractive. Bonds and any other fixed-rate securities will not pay as much as the amount paid by other people when the rate of funds is decreased. A lower rate of federal funds decreases the value of currencies on the foreign exchange market. Setting for low interest rates has little impact on consumer purchasing at time when economic recession and high unemployment rate are presented. Liquidity trap can also be encountered upon the failure of the federal government in using the interest rates as a tool in influencing purchasing decisions or monetary policy.

Interest rates can significantly affect other facets of the economy such as business enterprises, government, and households. The levels of interest rates can be affected by the policies set out by the government other than the behavior of the borrowers. But both the lenders and the borrowers compensate for the expected inflation when there is temporary increase of the available money supply intended for the borrowers. Opposite will likely occur when the government will take and adopt a contradictory monetary policy. Should this be the case then borrowers may opt for a contradictory policy with the possibility that it may help lower the nominal interest rates. This only suggests the significant impact of lender-borrower cooperation for success.

In general, interest rates may serve as the driver for the increase of investment, the amount of loans taken by people from the bank, and consumer spending notwithstanding the fact that a greater portion of it is contained within the perception of the customers.