The Economy Research: Interest Rates in Deep and it's Effect (Essay Sample)

BUSINESS ECONOMICS
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An interest rate is considered as a charge in a loan to the borrower or the growth percentage of money for the saving account typically expressed as a percentage measured annually for the current outstanding loan. It may be based on mortgage, savings, Home, student loans among others mostly provided by banks both commercial and private institutions. It is charged as compensation by the lender for the loss of the assets. The lender could also have invested instead of lending, therefore, generating income from the asset. The rate is decided by both central bank, currency board or other regulatory committee by modifying it hence leads to changing banks vault through bank reserves and buying or selling government bonds.
Bank rates when changed it tries to force an influence on the overall level activity in the economy for the demand for, the supply of, goods and services be at least in balance. For the demand of goods and supply to exceed the supply it leads to rising above the bank target rates by inflation while when the supply of goods and services exceed the demand, there is fall below on the banks target. According to “Monetary Policy Committee of the Bank of England” the rate paid on the reserve balances which is held by the commercial banks and building societies it’s able to influence other borrowing and lending rates on them and hence spending on the economy so as to maintain the target. Low-interest rates affect the following. They include savings and spending decisions, wage costs, higher return and quantitative easing.
On the theoretical view “Ratio Theory” may illustrate on the low-interest rates of the British Economy. In microeconomic theory, it explains on the price determination for it states “every price is a function of the sets of supply and demand.” But on macroeconomic theory, the ratio theory is further considered as “The Goods-Money Framework.” It’s used to examine the impact of interest rates suppression over the real output and the price level. The price level implies to depend on both supply and goods aggregate for goods and services and demand and supply for money. The price level is rather considered the relative measurement of the market value goods on the terms of the market value of the money.
By extending the microeconomic principle to macroeconomic theory, its illustrates that the general price level of the goods is the ratio to the markets value measured in terms of the standard units and divided by the market value the money. It clearly states that “if the market value of goods falls, then the price level will fall or if the market value of money falls, then the price level will rise.”
Savings and spending decisions. Most people may are affected negatively especially on the savers since the saved amount gains low-interest rates in the banks. This almost applies on the pensioners who mostly relies on the interest payments for income hence get fall in relative income. It is considered that if the inflation is compared to be higher than the nominal interest rates, then there is fall in the real value for saving. It will encourage the consumer on more spending, therefore, leading to increased spending on imports. It will cause a deterioration on the account. On the British Economy, the period 2009-2013 inflation was observed to be above the rates which meant that savers were on low rates. But in 2015, that is, seven years from 2009, inflation fell to 0% below the base rates of 0.5% which illustrates that the interest was now positive.
The low-interest rates also are of benefit to house owners. Since low rates lead to cheaper mortgage payments, it shows that buying a house maybe even cheaper and attractive. If the low-interest rates persist it rises the demand for houses hence pushing up the prices on the records levels. This may be a biased situation since it affects the people renting the houses for the price of rent would be higher. Therefore, low-interest rates are considered not a balanced situation.
Wage costs is also a factor caused by the low-interest rates. This mainly results to the employer having few worker since they have not limited funds to pay the employees. For example, pensioners who rely on the interest may be significantly affected. Their cash flows may not be available. Demand and supply go one in hand in the economy. If wages are not available, the services may be lowered both in demand and supply. Low-interest rates may only favor the banks for the many withdrawn will be lower than the money deposited.
Higher return which may also be described as depreciation in the exchange rate. If a country reduces its interest rate, it makes better decisions for one to take the risk of saving in another country. Which is more attractive and better way to save the interest of the saving. The demand of the country’s money would be less hence causing a fall in its value. This would result to country’s export more competitive and imports more expensive which may help to increase the aggregated demand of the same goods and services of the country. Low-interest rates may also give a better rate of return considering the investment since the borrowing is low. The aggregate demand formula is AD= C + I + G + (X-M) where C, I and (X-M) are all increased.
Qualitative easing is considered as an unconventional monetary policy tool usually used by the central banks in the purchase of financial assets from private institutions for easing pressure on the financial system. It increases the prices of purchased assets while lowering their yields and therefore raising their financial base failing to alter its composition in the central bank. It’s considered on short-term interest rates are at approaching zero and does not involve the production of new money from the central bank. If the money supply increases too quickly, the qualitative easing leads to increase in rates of inflation because there is still a fixed amount of goods for supply when there is more money available in the economy. The central bank, therefore, decides to reserve the money rather than leading them to individuals or even the businesses. Most businesses rely on the lending from banks. Therefore, this would be a disadvantage to most of them closing up or losing their need to work.
Most banks benefit profitably. When the rates are low, the banks may experience a reduce in the profits which may push the banks to charge lower rates in lending but not act on the deposits negatively. This causes the bank's deposit, and lending rates differ in the margin. But low-interest rates may also benefit in a way that rising as...