Effect of lower interest rate on economy

Expert Solution

Reduce saver incentive. Lower interest rates give the savings a smaller return. A lower saving opportunity would allow consumers to spend instead of holding onto income.
Cheaper cost to borrow. Lower interest rates make it cheaper to borrow. It will encourage consumers and businesses to take out loans to fund more spending and investment.
Lower interest payments on mortgages. A fall in interest rates will lower the monthly cost of repaying mortgages. This will leave more disposable income for households and should cause consumer spending to rise

Prices for the assets are rising. Lower interest rates make purchasing properties such as homes even more appealing. This will cause house prices to rise and thus, wealth to increase. Increased wealth will also stimulate consumer spending, as morale will rise. (Wealth effect) Exchange-rate depreciation. If the UK reduces interest rates, then it makes saving money in the UK even less enticing. Therefore the Pound Sterling will be less demand causing a decline in its value. A fall in the exchange rate is making UK exports more competitive and more expensive to import. That also helps to boost aggregate demand.

Rahul Sunny answered 4 months ago

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