Upcoming SlideShare
×

# Interest rate by idrees iugc

1,263 views

Published on

0 Likes
Statistics
Notes
• Full Name
Comment goes here.

Are you sure you want to Yes No
• Be the first to comment

• Be the first to like this

Views
Total views
1,263
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
28
0
Likes
0
Embeds 0
No embeds

No notes for slide

### Interest rate by idrees iugc

1. 1. chapter: 1 Introduction<br />1.1. BACKGROUND<br />Interest rate is one of the important macroeconomic variables, which has an impact on economic growth. Generally, interest rate is considered as the cost of capital, means the price paid for the use of money for a period of time. a borrower point of view, interest rate is the cost of borrowing money (borrowing rate), from a lender’s point of view, interest rate is the fee charged for lending money (lending rate). Good investors always look for investing in an efficient market. In an inefficient market few people are able to generate extra ordinary profit causes of confidence losses of general people about the market. In such cases, if the rate of interest paid by banks to depositors increases, people switch their capital from share market to bank. This will lead to decrease the demand of share and to decrease the price of share and vice versa. On the other way, when rate of interest paid by banks to depositors increases, the lending interest rate also increases lead to decrease the investments as a result production decreases which will become the cause of lower gross domestic product. Theoretically there is inverse relationship between high interest rate and GDP. Among macroeconomic correlations, interest rate and gross domestic product relationship places a fundamental role.<br />Gross Domestic Product <br /> The measure of aggregate output in the national income accounts is Gross Domestic Product (GDP) according to Blanchard (1997). He stated that there are three ways of thinking about an economy’s GDP. <br />These are that: <br />GDP is the value of the final goods and services produced in the economy during a given Period.<br />GDP is the sum of value added in the economy during a given period.<br />GDP is the sum of incomes in the economy during a given period.<br />When the government increase interest rate consumers will consume low and save high amount of their income which also affect the multiplier effect. In the developed countries the government is pursing the policy of low interest rate to encourage investors to invest more to produce more goods.<br />The resulting low or negative interest rates discourage saving mobilization and channeling of the mobilized savings through the financial system. This has a negative impact on the quantity and quality of investment and hence GDP. Therefore, the expectation of interest rate reform was that it would encourage domestic savings and make loan able funds available in the banking institutions. The critical question, therefore, is whether real interest rates have any positive effect on economic growth in Pakistan. The purpose of this study is to investigate the relationship between real interest rates and gdp in Pakistan. This is important because the behavior of interest rates, to a large extent, determines the investment activities and hence GDP of a country. <br />There is no doubt a theoretical link exists between interest rates and the financial structure of firms. Lower real interest rates in a pure market economy will boost investments and so also increase productive capacity. <br />Higher interest rates reduce the growth of consumer spending and economic growth. This is because:<br /><ul><li>More incentive to save in a bank rather than spend.