Effect Of Interest Rates On Economy

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When you decide on monetary terms, interest rates are a major factor. The interest rate is primarily responsible for your money-related movements. A simple fact anyone can grasp is that higher interest rates will decrease your savings. You would be able to put more money into your savings account if the interest rate is higher. This would increase your earnings. It can be stated that everyone prefers to pay lower interest rates and get higher ones.

It is important to analyze it over the long-term. However, interest rates can have an impact on forecasted calculations by bankers, lenders and other people involved in the business. A new business that has low interest rates is more likely to be successful. However, if an abrupt rise in interest rates is introduced between these two points, business and future planning will be negatively affected.

Influence on the relationship between borrower/lender

Market functioning is influenced in large part by interest rates. Lender and borrower are affected by changes in interest rates. Lenders are those who lend money and get interested. Borrowers can also take the money and pay interest. If there are comparatively higher savings on the lender’s part, then distribution of loan funds increases and interest rates decrease. If the number of borrowers grows and the savings are not sufficient to distribute among all, the interest rate will rise. In a market economy, interest serves many important functions.

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There is no one or particular natural rate of interest. Different markets have different interest rates. The entire economy is affected by many foundational interest rate that are dependent upon the central bank.

The Economic Structure and its Effect

The structure of an economy is also influenced by interest rates. They affect the distribution of resources and the labor/workforce. It determines the growth or decline of industries where people arrange financial capital.

The terms “total consumer expenditure” and “net manufacturing output” were used by the U.S. Bureau of Labor Statistics, (BLS), or the National Bureau of Economic Research, (NBER). This means it is easy to measure small attributes and make them up to large ones.

However, you might miss essential attributes by emphasizing macro and broad aspects. The important attributes alone are not enough to justify the entire procedure. We can take, for example, the Bureau of Economic Analysis (BEA); it shows that the US’s total GDP growth in 2014 was 3.66%. This is compared to 6.31% in 2004. This does not mean that the economic structure in 2004 was twice as strong.

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Mortgages and the Housing Market: What Does it Mean?

Mortgage borrowing is easy because of the low interest rates. It supports long-term capital-intensive projects such as the construction of houses. In 2004, the economic structure was poor, especially in the housing market. The U.S. examined property sales and home pricing reports over six consecutive years beginning in 2001. In which case, the Federal Reserve reduced the Federal Funds’ rate from 5.5% to 1.75%.

The number of borrowers increased due to lower interest rates. Many projects were started for the long-term. This allowed people to invest without worrying about any doubtful assets, and their savings declined. All of these were done to overcome inflation. In 2004, many people found work in home construction because of the demand in the market for their services, which was indicated through casuistic attributes. Simply put, the entire economic structure was to blame.

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