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ECONOMICS
Asked by Jackson

How interest rates affect market participants?

When interest rates rise, it will cost market participants more to borrow money, financial institutions often increase the rates they charge their customers to borrow money. Individuals are affected through increases to credit card and mortgage interest rates, especially if these loans carry a variable interest rate. This has the effect of decreasing the amount of money consumers can spend. After all, people still have to pay the bills, and when those bills become more expensive, households are left with less disposable income. This means people will spend less discretionary money, which, in turn, affects businesses' revenues and profits. Investors and economists alike view lower interest rates as catalysts for growth—a benefit to personal and corporate borrowing, which, in turn, leads to greater profits and a robust economy. Consumers will spend more, with the lower interest rates making them feel they can finally afford to buy that new house or send their kids to a private school. Businesses will enjoy the ability to finance operations, acquisitions, and expansions at a cheaper rate, thereby increasing their future earnings potential, which, in turn, leads to higher stock prices.

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Alyssa Miller
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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.

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Usman Haroon
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