Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
Upcoming SlideShare
Interest rates & its effects on Investments
Next
Download to read offline and view in fullscreen.

1

Share

Download to read offline

Interest Rates

Download to read offline

Related Books

Free with a 30 day trial from Scribd

See all

Interest Rates

  1. 1. INTEREST RATESThe Price of Liquidity
  2. 2. How does Interest Rates Affect AD?• Consumption – Many consumer goods are bought on credit, so an increase in interest rates discourages this as the price of borrowing has now gone up. So AD decreases. – Equally AD will increase if interest rates fall as saving is discouraged and borrowing is now more attractive
  3. 3. How does Interest Rates Affect AD?• Investment – Much of the investment is financed through borrowing so the same principle as consumption applies here. – LOW INTEREST RATE = HIGHER INVESTMENT
  4. 4. How does Interest Rates Affect AD?• Net Exports – Interest Rates can influence the value of a currency – This is due to the flow of Hot Money, the higher the interest rate the greater the flow the stronger the local currency gets. – A strong pound will lead to imports being cheaper, so consumers suck in imports, this leads to a trade deficit and a low net exports – Exports as a result of a strong pound are now more expensive
  5. 5. •Strong•Pound•Imports•Cheaper•Exports•Dearer
  6. 6. Interest Rates & Inflation• Interest Rates can be used to help a central bank reach an inflation target• A higher interest rate will mean inflation is lower• A lower interest rate will mean inflation is higher• This can be observed on a AD/AS Curve
  7. 7. LOW INTEREST RATES HIGH INTEREST RATESPL3PL1PL2 AD2 AD1 AD3 Y2 Y1 Y3
  8. 8. Interest Rates & Unemployment• A tightening of monetary policy (raising interest rates) will lead to unemployment due a fall in output• A loosening of monetary policy (lowering interest rates) would increase employment due a rise in output
  9. 9. Interest Rates & Current Account• If Interest Rates are high then it lowers AD which discourages the purchase of Imports which means the trade balance would look favourable• Lower interest rates would lead to a rise in AD so consumers suck in imports, which makes the trade balance worse
  • HongThHng3

    May. 24, 2021

Views

Total views

10,229

On Slideshare

0

From embeds

0

Number of embeds

1

Actions

Downloads

282

Shares

0

Comments

0

Likes

1

×