Asked by JacksonEconomics 📈

How interest rates affect market participants?

VERIFIED

Sultan Ali

UCL Graduate and Fully qualified accounting and economics teacher

Interest rates are very important in our economy, first thing first, interest rates refers to the cost of borrowing. Now in terms of consumers, if there’s an increase in interest rates those with mortgages will have higher monthly payments and less disposable income, they’ll make cutbacks to spending affecting businesses who in turn increase unemployment due to making lower profits given lower consumption. So you can see how an change in interest rates can have a multiplied effect on our economy. Generally business confidence is likely to be negatively impacted by an increase in interest rates as the higher borrowing costs mean profit predictions are lower deterring investment. sometimes Interest rates are needed to stop consumer spending due to inflation. However, our economy is Dynamic and there are other influences that will either cushion these effects or make them even more exaggerated. Hope this helps

VERIFIED

Usman Haroon

Medical Student at King's College London.

Hi Jackson, Interest rates are crucial in the modern market and have two key functions: 1) They affect people and businesses seeking loans. This is because banks provide loans but charge interest on repayments. So the higher the interest rate, the more banks charge to lend money, and the less likely people are to borrow money. Conversely, the lower the interest rate, the cheaper it is to take out a loan, and so people and businesses are more likely to borrow money to buy houses or invest in new projects. 2) They affect people and businesses looking to save money. This is because banks reward people and businesses with interest (ie free money) the more/longer money is stored in the bank. Hence, if interest rates are high, people will get more interest for saving, and are therefore more likely to save money in the bank and spend less on goods and services in the marketplace. This is good for consumers but bad for businesses! Hope that helps.

Answers from these tutors

Asked in Economics 📈

ASKED BY MADDIE

ECONOMICS 📈

What is the attitude for the soldier poem by rupert brooke?

Although there are many interpretations of the poem, it can be deduced that the soldier in the poem is suggested to be patriotic and thoughtful over...

ASKED BY PHOEBE-LILY

ECONOMICS 📈

Choose a High Income Country. Explain (using development indicators) why it is in that category?

Let’s take Switzerland. It is considered a developed country and is also one of the highest income country. Switzerland is in this category because ...

ASKED BY SELINA

ECONOMICS 📈

What is economies of scale? And how does it impact cost?

Scale economies have brought down the unit costs of production and have fed through to lower prices for consumers. Most firms find that, as their pr...

ASKED BY DUAFATEMA

ECONOMICS 📈

1Using income elasticity of demand explain the reasons for the increase in profits during the recession for businesses like Aldi, Lidl etc?

Income elasticity of demand refers to the responsiveness of a demand for a product to a change in income. Sometimes demand for some products rise wh...

ASKED BY IFEANYICHUKWU

ECONOMICS 📈

What are the determinants of aggregate demand in the short and long run?

In the short run: Consumption+Investment+Government Spending+Net Exports These are the same in the long run, the difference between the short run an...

ASKED BY BONNIE

ECONOMICS 📈

What are health care services?

Health care services relate to bodies, organisations and facilities which are set up to take care of your health. For example, basic health care ser...

ASKED BY VALENTINE

ECONOMICS 📈

Explain supply and demand please?

Demand is the willingness to purchase a given good or service at a particular price at a given time. Supply is the willingness of manufacturers to s...

ASKED BY KAT

ECONOMICS 📈

Why has the US trade deficit narrowed recently ?

The US trade deficit actually recently recorded its first rise in four months. Prior to this, the narrowing largely should stemmed from increases in...

ASKED BY INES

ECONOMICS 📈

What is GDP and GNI?

GDP or Gross Domestic Product is one of the most widely used measures of an economy’s output. 📈 It could be defined as “the total value of goods an...

ASKED BY JACKSON

ECONOMICS 📈

How interest rates affect market participants?

Interest rates are very important in our economy, first thing first, interest rates refers to the cost of borrowing. Now in terms of consumers, if t...

Find me a tutor

We take your privacy seriously. View our policy.