interest rate

Examples of interest rate in the following topics:

• The Equilibrium Interest Rate

  • The interest rate is the rate at which interest is paid by a borrower (debtor) for the use of money that they borrow from a lender (creditor).
  • Interest rates fluctuate over time in the short-run and long-run .
  • Changes in expectations will therefore affect the equilibrium interest rate.
  • Interest rates fluctuate over time as the result of numerous factors.
  • Interest rates fluctuate based on certain economic factors.

• Interest Rates and Economic Rationale

  • The interest rate is one of the primary influences on economic rationale.
  • The interest rate is the rate at which interest is paid by a borrower (debtor) for the use of money borrowed from a lender (creditor).
  • Interest rates also influence inflationary expectations.
  • When the interest rate is lower, it usually increases the broad supply of money.
  • The interest rates reached 14% in 1969 and lowered to 2% by 2003.

• Determinants of investment

  • The two primary factors that influence economic investment are income and the interest rates.
  • The two primary factors that influence economic investment are income and the interest rates.
  • However, a high interest rate can discourage investment because high interest rates make it more expensive to borrow money.
  • To encourage investment, interest rates need to be lower .
  • The Bank of England raises or lowers interest rates to encourage or discourage investment.

• The Taylor Rule

  • Taylor's rule was designed to provide monetary policy guidance for how a central bank should set short-term interest rates.
  • The rule stipulates how much a central bank should change the nominal interest rate (real rate plus inflation) in response to changes in inflation, output, or other economic conditions.
  • The factors that the Taylor rule suggests taking into account when setting inflation-adjusted short-term interest rates are:
  • what the level of the short-term interest rate is that would be consistent with full employment.
  • The Taylor rule advocates setting interest rates relatively high (contractionary policy) when inflation is high or when the employment rate exceeds the economy's full employment level.

• The Demand for Money

  • Specific to the liquidity function, L(R,Y), R is the nominal interest rate and Y is the real output.
  • The interest rate is the rate at which interest is paid by a borrower (debtor) for the use of money that they borrow from a lender (creditor).
  • Interest-rate targets are a tool of monetary policy.
  • The quantity of money demanded varies inversely with the interest rate.
  • Relate the level of the interest rate to the demand for money

• Using Monetary Policy to Target Inflation

  • Because interest rates and the inflation rate tend to be inversely related, the likely moves of the central bank to raise or lower interest rates become more transparent under the policy of inflation targeting.
  • if inflation appears to be above the target, the bank is likely to raise interest rates.
  • if inflation appears to be below the target, the bank is likely to lower interest rates.
  • Under the policy, investors know what the central bank considers the target inflation rate to be and therefore may more easily factor in likely interest rate changes in their investment choices.
  • Strictly or blindly adjusting interest rates will potentially be ineffectual and restrict economic growth when it was not necessary to do so.

• The Federal Funds Rate

  • The Federal Funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve.
  • The Federal Funds rate (or fed funds rate) is the interest rate at which depository institutions (primarily banks) actively trade balances held at the Federal Reserve.
  • Banks do this by borrowing reserves from other banks with excess reserves, and the weighted average of these interest rates paid by borrowing banks determines the federal funds rate.
  • The Federal Funds rate is directly related to the interest rate paid by firms and individuals.
  • In fact, many mortgages and credit card interest rates are indexed to the Federal Funds rate - a homeowner might pay an adjustable interest rate that is set at the level of the Federal Funds rate plus four percent, for example.

• Setting and Achieving the Interest Rate Target

  • Though the central bank can directly influence the money supply the majority of its activities center around interest rates, the outcome of changes to the money supply.
  • The rate that Fed member banks charge one another is referred to as the Federal Funds rate, or Fed Funds rate for short (rate for funds held at the Fed).
  • Adding to the money supply will typically lead to lower interest rates, while reducing the money supply will increase interest rates.
  • The Fed actively adjusts the buying and selling of bonds to achieve the target interest rate.
  • Describe the way in which the Federal Reserve targets the interest rate

• Incentivizing Saving and Investment

  • Take, for example, a high interest rate.
  • At a high interest rate, it is very expensive to borrow money: investors will not want to invest because they have to pay a lot of interest on their loans.
  • High interest rates encourage savings and discourage investment.
  • The precise opposite is true for low interest rates.
  • Low interest rates encourage investment and discourage savings.

• The Discount Rate

  • The rate that member banks charge each other is the federal funds rate and the rate the Fed charges is referred to as the discount rate.
  • Open market operations entail Fed intervention in the buying and selling of government bonds to achieve a change in the money supply and the corresponding change in the interest rate.
  • The Fed sells bonds to reduce the money supply and increase the prevailing interest rate and buys bonds to increase the money supply and reduce the prevailing interest rate.
  • The interest rate is an active target and is set as a target rate range by the Fed; it is conveyed to the public by the Federal Reserve Open Market Committee (FOMC) as the fed funds target rate (short for the Federal Funds rate).
  • However, as noted in the aforementioned historical example, the discount rate, in conjunction with the fed funds target rate, may be purposely maintained at a lower interest level to encourage borrowing and increase growth when the economy is showing signs of either slowing or contracting.