Question

Almost every day, there’s another discussion in the various news outlets concerning the direction of interest rates and the effect on the economy, various industries, and the individual consumer. Discuss the factors that influence interest rates, and why interest rates are so critical to economic growth or retraction.

Answer 1

Answer: Factors affecting Interest rate- Interest rate is affected by these factors:

• Economic growth rate
• Inflation
• Unemployment
• Exchange rate
• Commodity prices
• Monetary policy
• Manufacturing capacity

Interest rates are so critical to economic growth or retraction- Interest rates play an important role in economic development. When there are lower interest rate in the economy, people take more loans and demand for more goods and services and spend more, their propensity to consume increases while on the other hand production of companies remain constant and demand shoots up then prices of commodities increase and inflation takes place in the economy.

To reduce the inflation, Federal reserve has to increase the interest rate, when interest rates are increased, people take less loan and consumes less, they demand for less goods and services and inflation remains on track.

Stability in interest rate is very important. It should not be higher or lower.