 |
blacksacademy.com | |
|
blacksacademy.com | |
Business & Interest Rates |
Interest rates |
| Interest rates are the cost of borrowing money. If you put money into a bank (or lend it to someone) you obtain a percentage back every year — this is called the interest rate. Likewise, if you lend money you obtain a percentage back as a result of lending it. |
| Governments use interest rates mainly to control inflation. Interest rates also affect the level of investment in a country and exchange rates. |
| When interest rates go up, the cost of borrowing increases. Firms have to pay more for money they borrow, and this discourages investment. Since investment falls, this means that there is a reduction in demand for goods and services, so this leads to a fall in total (aggregate) demand. |
| The rise in the cost of borrowing, as a result of increasing interest rates, also affects consumers. Consumers also have to pay more for shopping on credit — they pay the credit card companies a higher rate of interest, for instance. The rise in interest rates discourages consumers from spending, so consumption expenditure falls. This also leads to a fall in total (aggregate) demand in the economy. |