Question

Thoroughly Discuss Interest Rates

Answer 1

Interest rates are those rates which are decided by Central Bank in its monetary policy and it is subjected to change regularly in order to align with the economic development, so that it can help in fostering the economic growth and it can also contain the money supply in the economy.

When the economy is in an inflationary cycle, and there is high level of money supply in the overall economy, the central bank will look to decrease the money supply by increasing the rate of the interest, so that the overall prevalent rate of interest in the economy will go up, and it will lead to cutting the overall demand.

When the economy is in deflationary cycle, the central bank will always be looking for decreasing the interest rate to control the money supply in the overall economy, and this will be leading to decrease in the interest rate and it will cause the stimulation in the demand on the upside, so the money supply in the economy will be increased.

so this is the fundamental mechanism of interest rate which are prevalent in an economy.