Asked by JacksonEconomics 📈

How interest rates affect market participants?

Profile picture

VERIFIED

Verified tutor tick

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

Profile picture

VERIFIED

Verified tutor tick

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 FATIMA

ECONOMICS 📈

What is market structure?

A market structure is just the way businesses operate. There are 4 main ones: Perfect Competition, Monopolistic Competition (e.g. Local Corner Shop)...

ASKED BY ISMAIL

ECONOMICS 📈

What factors affect the Aggregate Demand curve?

Government spending Consumer spending Exports Imports Investment

ASKED BY NIKITA

ECONOMICS 📈

What are direct transfers?

A direct transfer, or a transfer payment (or government transfer or simply transfer) is a redistribution of income and wealth (payment) made without...

ASKED BY SUMAYA

ECONOMICS 📈

What is the formula for income elasticity?

The formula for income elasticity of demand is: elasticity = % change in quantity demanded / % change in price This is because we are looking for ho...

ASKED BY KING

ECONOMICS 📈

What are the links that exist between ‘economic growth’, the ‘circular flow of income’ and the ‘multiplier effect’?

Every time there is an injection of new demand into the circular flow there is likely to be a multiplier effect. This is because an injection of ext...

ASKED BY NADINE

ECONOMICS 📈

I don’t understand the market structures Perfect competition, Monopolistic competition, Oligopoly and Monopoly. Could you please explain what they are and what they do?

That's quite a few things. I usually remember it with the acronym "SEPIKNIC": Sellers and Buyers = How many are there? Entry and Exit = Are there ma...

ASKED BY EUNICE

ECONOMICS 📈

What is quantitative easing in macroeconomic?

In the UK, Quantitative easing is an ‘unconventional’ form of monetary policy that the Monetary Policy Committee has carried out in order to stimula...

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 ISMAIL

ECONOMICS 📈

How do countries measure growth?

The most common way countries measure growth is through GDP. GDP is an acronym for 'gross domestic product.' Gross domestic product is the logical e...

ASKED BY ABAS

ECONOMICS 📈

What are the benefits of having many different car manufacturers, instead of just one manufacturer that holds a pure monopoly in the market?

Competition is a critical driver of performance and innovation. It benefits everyone by enabling us to choose from an wider choice of excellent cars...

Find me a tutor

We take your privacy seriously. View our policy.