How does changing the interest rate create a wide impact on the economy of a nation?
In: Economics
i assume you mean on bank accounts
so basically, if you get little to no interest, the idea is that you’ll spend your money because keeping it in the bank doesn’t give you very good interest.
increasing the interest rates encourages people to save their money in various bank accounts or invest it.
however, i kinda do the opposite . when i see that the interest rates have tanked, i keep as much money in the bank as possible. sure it’s not a lot of interest, but i need to make sure that i have enough money to live on. when the interest rates go up, i spend my money more, because i know that even though i have less money in the bank, it’s still getting a good interest rate
If an interest rate is low, that means you’re getting a small return on your savings.
if an interest rate is high, that means you’re getting a larger return on your savings.
If an interest rate gets lowered, people have less incentive to save, so theoretically will spend more money.
If an interest rate gets increased, people have more incentive to save, so theoretically will spend less money.
Gross Domestic Product (GDP) is basically the market value of an economy.
GDP = Consumption + Government spending + Investment + Net exports.
So when I say people are spending are more money, this applies to both normal consumers and companies. So lower interest rates should in theory increase Consumption and Investment, thus increasing GDP.
A recession is when there’s 6 months of GDP going down. Which is why governments often lower interest rates in times of a crisis to stimulate GDP growth. As mentioned before, lowering interest rates encourages more spending, which increases GDP.
The interest rate reflects how expensive it is to borrow money. A high interest rate means borrowing money is relatively expensive, and people are thus less likely to borrow money to make large purchases like homes, cars, equipment for their businesses, etc. A low interest rate means borrowing money is relatively cheap, and people are thus more likely to borrow money to make those same purchases. If the economy is starting to slow down, the government will seek to lower interest rates in order to get people spending more money on purchases. If the economy is starting to go too fast, the government will seek to increase interest rates in order to slow down spending on purchases.
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