Interest Rates

Question 1

Define interest rates

Answer 1

the cost of borrowing money and the return for lending money.

Question 2

Define disposable income

Answer 2

income left for spending after taxes have been deducted from gross income.

Question 3

Define discretionary income

Answer 3

income available to spend on luxury or non-essential goods or services.

Question 4

Why does the government influence interest rates?

Answer 4

influencing interest rates also influences spending, and therefore the rate of inflation, the level of employment, the rate of exchange, and the level of exports and imports.

Question 5

Why do changes in interest rates influence the demand for goods and services?

Answer 5

Because the cost of borrowing money will change. This affects people ability to make mortgage, loan, and credit repayments. It also affects discretionary income, which affects spending levels.

Question 6

What is the effect of rising interest rates on business costs?

Answer 6

fixed costs will rise for firms who have a lot of long term loans. unit costs will increase. if price remains the same, profit margins will fall. if price increases, they are less competitive.

Question 7

What is the effect of falling interest rates on business costs?

Answer 7

a fall in interest payments on loans will benefit firms that have a lot of long term loans, as their fixed costs will fall. this will reduce unit costs, and make it possible to cut prices, giving them a competitive advantage.