Question

Microeconomic question: Discuss relatively low level of maximum interest rates which banks are allowed to charge their customers.(200 words)

Answer 1

Putting up interest rates on loans, by the banks is a source of interest income, but the interest rate is kept at relatively low levels. It is the part of monetary policy implemented by the Fed that is expansionary in nature. Due to this reason, a lower federal fund rate is kept by the Fed and in accordance to it, prime rate is decided. So, a lower federal fund rate, leads to lower maximum rates, banks can charge to its customers. The ultimate aim of this policy, is to make borrowing to be less expensive. It encourages households and firms to increase their consumption and investment spending. As a result, the economy expands with the help of these spending and Fed achieves its goals.

Further, more entities borrowing funds from the banks, also accrue huge interest income that further facilitates banks to achieve their own business objective. Hence, it is the lower interest rate that helps maximum population to be covered up under the banking services including loans and advances so that it makes a positive and inclusive impact upon the economy.
If relatively lower interest rates are not maintained, then it is discouraging to the customers and they do not borrow. It brings lower growth to the economy and it is detrimental to the economy of the country.