Question

Things are not as simple as up is good and down is bad (visa versa). Consider the following statements.

"A rise in long-term interest rates reflect good economic conditions" Versus "A rise in long-term interest rates reflects bad economic conditions."

Both could be true. How is that possible?

Answer 1

Interest rates can have both positive and negative effects . When the Federal Reserve Bond (the Fed) changes the rate at which banks borrow money, this has a ripple effect across the entire economy.

Higher interest rates mean that consumers don't have as much disposable income and must cut back on spending. When higher interest rates are coupled with increased lending standards, banks make fewer loans. This affects not only consumers, but also businesses and farmers, who cut back on spending for new equipment, thus slowing productivity or reducing the number of employees. The tighter lending standards mean that consumers will cut back on spending, and this will affect many businesses' bottom lines. This will cause the businesses to reduce the number of employees that they have and to hold off on any major equipment purchases.This will bring the economy down. Vice versa higher interest rates mean higher borrowing costs, people will eventually start spending less. The demand for goods and services will then drop, which will cause inflation to fall.Every individual, business and government that is borrowing money, however, someone else is lending it. Another name for lenders is savers who want to invest the money they’re setting aside for future use and make a little (or big) return.Rising rates means people who save money in certificates of deposits, money market funds and bank accounts will see higher return. An increase in saving will tend to bring the banks to lend more to firms for investment.More investment means more capital stock and in return more economic growth.