Interest rates

Question 1

interest rates

Answer 1

the cost of borrowing money and the reward for saving money

IR increase = borrowing expensive so demand falls. saving attractive so spend less

IR decrease = borrow more so demand rises. saving less attractive do spend more

Question 2

factors that influence IR : BoE base rate

Answer 2

demand and supply of credit ~ borrowing money.

• high demand means IR rise
• high supply means IR fall

Question 3

factors that influence IR : state of the economy

Answer 3

• stable economy ~ high employment levels, demand gets higher for funds
• individual and firms invest

Question 4

factors that influence IR : inflation

Answer 4

• BoE uses IR to control it
• if inflation is rising/high ~ higher IR to bring it down
• IR control how people spend ~ disposable income

Question 5

effect on consumers

Answer 5

• changes to IR will affect demand ~ low means spend more
• receive interest on savings ~ IR is high means save not spend
• buy on credit ~ IR affect attractiveness of borrowing. high rate means low demand
• higher IR ~ consumers with loans will have less disposable income

Question 6

effect on producers

Answer 6

SAVING & BORROWING :

• firms with high bank loans or overdrafts are sensitive ~ repay asap
• IR are a cost and affect profit levels

INVESTMENT :

• cost of borrowing increases ~ more expensive to invest in capital
• suppliers may increase prices to compensate for higher interest payments
• pass additional costs onto consumers