How does changing the interest rate create a wide impact on the economy of a nation?
In: Economics
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.
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