12 the relationship between the interest rate and gdp lev

1. 12
The relationship between the interest rate and GDP level
Name of the student
Name of professor
Date of submission
The relationship between the interest rate and GDP level
Abstract
The objective of the article is to determine the relationship
between the interest rate and the GDP level of the nation.
Secondary data was used from the IMF statics, where data on
the level of GDP and the interest rate was downloaded and
analyzed to determine the correlation between the interest rate
and the level of GDP. Data were analyzed by the use of
Microsoft Excel and statistical packages for social science.
Descriptive statistics were first calculated to give a general
view of the data. The second step was the calculation of Pearson
correlation and regression analysis to determine the correlation
that exists between the two variables and the influence they
have on each other, respectively. Similarly, higher interest rates
cause a reduction in disposable income cost of borrowing to go
high, therefore limiting consumer to increase consumption. This
will lead to a decrease in aggregate demand, which will further
cause lower economic growth, higher unemployment and
improvement in the current account. A correlation between the
GDP and the interest rate indicates the relationship between the
two selected variables. Comment by Will Ford: This sentence
seems to tag onto the last sentence in the previous paragraph.
Why is it not part of it or rather why is that sentence not part of
the second paragraph.

2. Introduction
The selected variables for the empirical study are interest rate
and GDP over some time. The economy depends on money
supply and money demand in the money market. The interest
rate influences the GDP because the investment level depends
on the status of the interest rate. When the interest rate is a high
investment level reduces because banks offer loans with a
higher interest rate, which discourages the investors because the
profit level will be less.
When the interest rate is low, more investors will be willing to
take loans from the bank to invest in more projects (Vives,
2019). When the level of investment increases, then the
productivity and output level increases which have an influence
on the level of GDP for the country. When the interest rate is
high, the level of GDP is low and when it is down, the GDP
increases.
The motivation for selecting the interest rate and GDP is to
determine the influence of interest rate and the GDP value. The
economic development of the nation depends on the GDP value.
Therefore, the government needs to determine the best
economic indicator that will lead to an increase in the level of
GDP. The interest rate is critical in determining the level of
GDP because the investment level depends on the interest rate.
When the interest rate is low, the level of GDP will increase
because the supply of money in the economy will be high as a
result of low interest which encourage investors to invest more.
The data for the analysis is obtained at IMF statistics which
contain data on the interest rate and GDP for different
countries. The information is helpful because it helps find the
relationship between the interest rate and the level of GDP. The
findings will help policymakers and the government develop
better strategies in managing the interest rate as a way of
increasing and working the GDP.
Background information between the interest rate and GDP
Gross domestic product (GDP) refers to the total market value
of the finished goods and services that are produced within the

3. borders of a country within a specific period of time. It majorly
involves subtracting consumption and government purchase
from the income. At the same time, interest rates are the amount
of money charged by a lender for the use of as asset expressed
as a percentage of the principal. Similarly, the interest rate can
be the cost of borrowing money or a reward for saving. It is
always calculated as the percentage of the amount saved or
borrowed.
The life cycle theory is concerned with the spending and
planning habits of people as they progress through their various
age levels. The assumption of the theory is that people seek to
smoothen the consumption throughout there lifetime by
borrowing when the disposable income is low and saving when
their disposable income is high. The theory determined that the
effect of interest rate on savings is unreal. Furthermore, it
stated that the influence of interest rate on GDP could be
divided into two products. Firstly, the substitution effect
suggests higher interest rates causes an upwards trend in the
price of consumption to the future price, therefore influencing
saving positively. Secondly, the income effect stipulates that an
increase in interest rate will increase income, increasing
consumption and decreasing savings. In third world countries,
the interest rate has a positive impact on GDP since the markets
are not well-developed (Abou, 2014). Comment by Will
Ford: Define the life cycle theory. Comment by Will Ford:
Synonym for theory? Comment by Will Ford: Should say
“not”
Similarly, the increase in interest rates causes the cost of money
to be expensive. This leads to a decrease in demand which
directly affects investments and indirectly affects wealth in the
private sector, and a reduction in consumption. Additionally,
high-interest rates initiate savings increase which attracts
inflows from foreign countries that lead to an increase in
currency. A study done in Jordan from 2000 to 2010 to
determine the effect of interest rate on GDP found that interest
rate had an impact on GDP with a coefficient of -0.152. Also,

4. the study implied that the interest rate had an effect of -0.34 on
GDP. Comment by Will Ford: 0.152 is considered
significant? Comment by Karthik Binnuri: The coefficient of
0.15 is negligible as the range would be -1 to 1 and co-relation
exists either closer to -1 or towards +1 and if the co-efficient is
0.15 which is near to 0 means very less impact, the data is not
good which was done. Prof asked to check the data regarding
the correlation to be towards 0.40 or 0.50 to show some impact
and needs to be away from 0 to provide evidence of co-relation
so please change this
An increase in the interest rate causes moderation in the growth
of an economy. Similarly, higher interest rates cause a reduction
in disposable income cost of borrowing to go high, therefore,
limiting consumer’s ability to increase their consumption
(Coscieme, Mortensen, Anderson, Ward, Donohue, & Sutton,
2020). This will lead to a decrease in aggregate demand, which
will further cause lower economic growth, higher
unemployment and improvement in the current account.
Alternatively, a high-interest rate causes a reduction in
inflationary pressure and an increase in the exchange rate.
Comment by Will Ford: Did you leave out a word or
something here? Did you mean limiting the consumer’s ability
to increase consumption? Comment by Karthik Binnuri: This
sentence is incomplete so please check the grammar of this
paper its important
Furthermore, an upward increase in the gross domestic product
that is economic growth will affect the interest rate in that it
will increase in the economy. In contrast, the interest rate will
be involved in a decreasing manner when GDP also decreases.
When the GDP decreases the total output is low hence interest
rate are also low due to low level of investment within the
economy.
Indicators of GDP and interest rate
The parameter under the GDP includes the total output of
productions within the country. It explains the accumulated
production within a specific period; usually, it is calculated

5. annually. The interest rate is measured as a percentage of the
interest charged by banks on loan acquired for investment
purposes.
The objective of the study
· To determine the relationship that exists between the interest
rate and the level of GDP.
Limitation of the study
The study is limited to the annual interest rate and `in the
United States of America and is used to determine the
relationship that exists between the two variables. Comment by
Will Ford: Is this the GDP of the world or a country?
Justification of the study
The findings of the study provide valuable information to be
used by policymakers on the best way of improving the GDP as
a way of improving the living standard and eradicating poverty.
The GDP plays an essential role in ensuring that the interest
rate is controlled. Comment by Will Ford: Isn’t it the other
way around? Comment by Karthik Binnuri: This sentence
needs to be looked and changed so please do it
Methodology
Research design
The study applied a cross-sectional research design where data
on both dependent and independent variables was collected and
analyzed simultaneously. Secondary data was collected from the
IMF statistics to be used for the analysis purpose. Descriptive
statistics were performed to have an in-depth understanding of
the collected data in terms of the mean, maximum, and
minimum. Pearson correlation was conducted to determine the
correlation that exists between the interest rate and the GDP
value. Finally, the regression model was performed to assess the
influence of the interest rate on the importance of GDP.
Data analysis
The variables are analysed using Microsoft excel and statistical
package for social sciences (SPSS) software. The results are
analyzed by the use of chart and graphs indicating the
correlation that exists between the two variables, which are

6. GDP and interest rate.
Results
Descriptive Statistics
Comment by Will Ford: Show me a chart. Comment by
user: I used descriptive statistics to provide a general
understanding of the data. Comment by Karthik Binnuri:
Prof is asking for charts with the descriptive statistics so please
provide charts or graphs as well
N
Minimum
Maximum
Mean
Std. Deviation
Interest rate
30
.02
23.50
4.3479
4.84658
GDP
30
35.79
242348.26
47051.0735
70415.72590
Valid N (listwise)
30
The highest level of GDP in the United States of America
during 30 years is 242348.26, while the minimum level of the

7. GDP from the analysis is 35.79. The standard deviation for GDP
is 70415.72590, which means that GDP is scattered from the
regression line of fitness. The calculation is based on a million
$. The highest level of interest rate is 23.50, while the lowest
level is 0.02, with a standard deviation of 4.84658 with a mean
of 4.3479. The descriptive statistics help in providing the
general characteristics of the selected variable, which is GDP
and interest rate Comment by Will Ford: Whose GDP are we
talking about? Comment by Karthik Binnuri: Comment by
Karthik Binnuri: The interest rate 23.5% was never been in last
30 years in US as per prof and asking for data gathered and
further asked to provide 5 to 10 years of relation and 30 years
data providing in one sheet Is difficult so please provide 5 to 10
years of data tables
Pearson Correlation Comment by Will Ford: Where are your
charts? Comment by user: The SPSS software used generated
tables and not charts Comment by Karthik Binnuri: Please
provide scatter plot and other graphs for the GDP correlation
along with the SPSS, and DATA tables as well.
Correlations
Interest rate
GDP
Interest rate
Pearson Correlation
1
.121
Sig. (2-tailed)
.523
N
30
30

8. GDP
Pearson Correlation
.121
1
Sig. (2-tailed)
.523
N
30
30
The correlation between GDP and interest rate is 0.523 for the
two tail statistics. The results indicate there is a positive
correlation between the interest rate and the GDP, and
considering that the Pearson correlation coefficient, there is a
strength shown by 0.523, which is above 0.5 value.
A correlation between the GDP and the interest rate indicates
the relationship between the two selected variables. When one
variable increases, it influences the other variable. Therefore,
there is a need for the government to control the interest rate if
it has to regulate its national GDP. The economic growth of the
country depends on its level of GDP. Therefore, it is essential
to control the interest rate so that the economy's investment can
be managed.
The regression analysis tables
Coefficients
Model
Unstandardized Coefficients
Standardized Coefficients
t
Sig.
B
Std. Error

9. Beta
1
(Constant)
39390.158
17580.914
2.241
.033
Interest rate
1761.967
2725.449
-0.121
.646
.523
a. Dependent Variable: GDP
From the regression analysis between the dependent variable,
which is the GDP, and the independent variable that is the
interest rate, the constant value is 1761.967, which means that
without the influence of interest rate, the level of GDP is
1761.967 units indicating that there are other factors which
determine the status of the GDP apart from the interest rate
represented by the value of the constant-coefficient value.
The slope of the regression equation is -0.121, which indicate
that one unit change in the level of the interest rate results in a -
0.121 change in the GDP. The negative sign is absolute,
meaning that when the level of interest rate increases with one
unit, it result in a 0.121 reduction in the status of the GDP.
When the interest rate reduces by one unit, it results in an
increase in the level of GDP by 0.121 value.
The results indicate that there is a correlation between the
interest rate and GDP, and the relationship is inverse, meaning
that increase in the value of one variable product in a decrease
in the level of another.

10. The graph indicates the distribution of interest rate over some
time about the distribution of GDP. When the level of interest
rate is low, the level of GDP is high and when the level of
interest rate is low, the level of GDP is high. Comment by Will
Ford: Chart doesn’t really explain anything without context and
I can’t see what you are going for here. Comment by user: The
chart is relating the GDP on Y-axis and interest rate on X-axis
as labelled on the graph Comment by Karthik Binnuri:
Comment by Karthik Binnuri: This chart is hard to read
and understand what is been represented in x axis or y axis and
the lines…Prof asked to insert the data tables and please
provide scatter plots graphs instead of SPSS graphs further the
interest rate in US was never 23.5% in last 30 years…it was
around 20% in 1970 which is 40 years old and not 30 years.
Prof was pretty unconvinced with the 23.5% interest rate in US
so please change the SPSS graphs to scatter plot graphs
Discussion
There is a correlation between interest rate and the level of GDP
in the country. When the government need to increase the level
of GDP as a way of improving the living standards of the
citizens. The GDP is one way of measuring the economic
development of the nation. The interest rate is controlled as a
way of regulating the money supply in the economy. To
increase the GDP, the government need to lower the interest
rate by reducing the reserve ratio and allows the bank to supply
money to the economy to help in boosting the investment.
The existence of a correlation between the GDP and the interest
rate indicates the relationship between the two selected
variables. When one variable increases, it has an influence on
the other variable. Therefore, there is a need for the government
to control the interest rate if it has to regulate its national GDP.
The economic growth of the country depends on its level of
GDP. Therefore, it is essential to control the interest rate so that
the economy's investment can be managed.

11. There is an inverse relationship between the interest rate and
GDP. When the rate of interest rate increases, it results in a
reduction in the level of GDP. At the same time, a reduction in
the level of interest rate increases the level of GDP. Interest
rate influences the money supply. Lower interest increases the
money supply. The demand for money also increases because
more people will be willing to take loans from banks to invest
because of the lower interest rate.
When more money is borrowed and invested, the demand for
money becomes higher than the supply, which starts forcing the
interest rate to increase to lower money demand to equate with a
reduction in the collection of money so that the market can
settle at the equilibrium level.
Recommendation
The government have to come up with better economic policies
that will ensure that the level of GDP is controlled so that the
interest rate can be managed. The government should ensure
through effective implementation of existing monetary policies
so that the interest rate does not go beyond equilibrium level
and remain at the point where more people will demand money
to be used for investment project as one way of increasing the
level of GDP. Comment by Will Ford: Pretty sure most
governments are aware of the negative and positive impacts that
interest rates can have on their economies. Comment by
Karthik Binnuri: Government would ensure effective
implementation but instead take an example of a government
interest rate situation and suggestion would be good as per prof
Conclusion
The economy depends on money supply and money demand in
the money market. The interest rate influences the GDP because
the investment level depends on the status of the interest rate.
The selected variables for the empirical study are interest rate
and GDP over some time. The economic development of the
nation depends on the GDP value. Therefore, the government
needs to determine the best economic indicator that will lead to
an increase in the level of GDP. The interest rate is critical in

12. determining the level of GDP because the investment level
depends on the interest rate. When the interest rate is low, the
level of GDP will increase because the supply of money in the
economy will be high as a result of low interest which
encourage investors to invest more.
The existence of a correlation between the GDP and the interest
rate indicates how changes in the level of GDP affects the
interest rate. When one variable increases, it has an influence
on the other variable. Therefore, there is a need for the
government to control the interest rate if it has to regulate its
national GDP. The slope of the regression equation is -0.121,
which indicate that one unit change in the level of the interest
rate results in a -0.121 change in the GDP. The negative sign is
absolute, meaning that when the level of interest rate increases
with one unit, it results in a 0.121 reduction in the story of the
GDP. When the interest rate reduces by one company, it results
in an increase in the level of GDP by 0.121 value. The results
indicates a weak correlation between the interest rate and GDP.
Comment by Will Ford: Correlation is not causation.
Comment by Karthik Binnuri: Correlation is not causation
prof requested to provide more correlation evidence.
Comment by Will Ford: Indicate a weak, but real
correlation. Also, Correlation is not causation. Comment by
Karthik Binnuri: Comment by Karthik Binnuri: Please check
this and make necessary changes as correlation needs to be near
to -1 or +1 and not near to zero please change this and make
this a better causation among other factors effecting interest
rate so please change it
References
Abou El-Seoud, M. S. (2014). The Effect of Interest Rate,
Inflation Rate and GDP on National Saving Rate.
Global Journal of Commerce and Management Perspective, 1-7

13. Coscieme, L., Mortensen, L. F., Anderson, S., Ward, J.,
Donohue, I., & Sutton, P. C. (2020). Going beyond Gross
Domestic Product as an indicator to bring coherence to the
Sustainable Development Goals. Journal of Cleaner
Production, 248, 119232.
Vives, X. (2019). Competition and stability in modern banking:
A post-crisis perspective. International Journal of
Industrial Organization, 64, 55-69.
Wei, Y., Li, Y., Liu, X., & Wu, M. (2020). Sustainable
development and green gross domestic product
assessments in megacities based on the emergy analysis
method—A case study of Wuhan. Sustainable Development,
28(1), 294-307.