Question

Interest rates in US have been at historically low levels. Discuss any negative implications of low interest rates in the long run. What might be the negative consequences of continued lowered interest rates for a long-term period? Please be specific in your response and try to give some examples along with references.

Answer 1

Any negative implications of low interest rates in the long run :

• One of the major effect of low interest rates is people will be less willing to save money for future. Specifically in Banking and Fixed deposits. More tendency will be invest in illiquid assets like stocks or even in real-estate. Affecting money flow in the economy will be less.

the negative consequences of continued lowered interest rates for a long-term period

• Major consequences of longer term will cause liquidity trap in the economy. As interest rate become less people will borrow and invest in illiquid assets like tocks or even in real-estate . Will create liquidity trap in the economy. For an example after the 2008 crisis US reduces interest rate for a long-term period. And it creates a liquidity crisis right now - As investment in real business is very less. Unemployment rate is rising continuouly.
• When interest rate continue low for a long-term period will potential to future inflation in the economy. As govt continues to infuse money in economy continuously through lowered rate will increase Money Supply. Resulting rise in inflation.