Question

could you expand on what an economy central interest is and how depressing it will effect the economy.

Answer 1

Interest rates play a key role in the economy and in the process of the economic cycle of expansion and recession. Market interest rates are the result of the interaction of the supply and demand for credit. They represent both the price of liquidity for businesses and the preferences for present versus future consumption by consumers and savers, and so they constitute a key link between on-paper finance and the real economic interests of households and individuals. As such, they are also a primary area of concern for economic policy makers and central banks, both in general and especially during challenging economic times.

1. Interest rates are a key link in the economy between investors and savers, finance and real economic activity.
2. Markets for liquid credit function similarly to other types of markets, according to the laws of supply and demand.
3. When an economy enters recession, demand for liquidity increases but the supply of credit decreases, which would normally be expected to result in an increase in interest rates.
4. However, a central bank, such as the Federal Reserve, can use monetary policy to counteract the normal forces of supply and demand to reduce interest rates, and this is why we actually see falling interest rates during recessions.
5. Supply

Firstly, the lower market interest rates discourage saving, and hurt savers who now receive a lower return in exchange for forgoing their own consumption for the present. Secondly, because this means that less saving occurs, the resale resources that saving frees up for investment under normal conditions don’t materialize. ​​​​​​​