Question

if the market intrest rate rise what happens?

Answer 1

Interest rates are increased by the central banks mostly to restrict the inflation in the economy, when it predict to have the inflation rate more than the target inflation rate.

If the market interest rates rises then the inflation growth tends to be restricted. Higher interest rates make the borrowing cost to be increased in the market and it lower the cash flow in the market. On the other side it encourage the population to be inclined towards doing more savings and earn interest rather than to put the money in the risky projects and in the market.

Effect of higher interest rates can be discussed as:

1. Borrowing Cost rises. The higher interest rates make interest payments on loans more expensive and it discourages people from borrowing and restrict their spendings. People already having loans will be left with the less disposable income because they spend more on interest payments.
2. Encourage to save more rather than spending. Higher interest rates make the savings more attractive and encourage the people to invest in bank deposits to gain high interest income rather than to invest in risky projects.
3. Higher interest rates increase the value of a currency It help to increase the currency of the country by having excess funds in savings and lowering import.
4. Consumtions falls. Interest rates lowers the money flow in the market and which results in the overall consumptions falls in the market.
5. Curb the Inflation. It curbs the inflation in the economy by restricting their consumptions and increasing the savings