1. Impact of the Money Supply on Interest Rates
1.1. 1-Money Supply
1.1.1. The total stock of money circulating in an economy is the money supply
1.1.2. The circulating money involves : currency, printed notes, money in the deposit accounts and in the form of other liquid assets
1.2. 2-Pure Keynesian Theory
1.2.1. The theory was developed by John Maynard Keynes, explained how a government can impact the interest rate through its influence on the supply of the money
1.3. 3-Correcting a Weak Economy
1.3.1. In case the economy is weak (slow down period
1.3.2. the government then would try to increase the level of spending by stimulating the economy. ( provide more finance to people to spend more by lower interest rate for loans )
1.4. 4-Correcting High Inflation
1.4.1. The high inflation
1.4.1.1. is possibly due to excessive spending that is pulling up the prices, which known as demand–pull inflation
1.4.2. In case of excessive inflation,:
1.4.2.1. proposes that focus on the spending as the variable must be adjusted. ( increase the interest rate for savings)
2. Impact of External Factors on Interest Rate
2.1. 1-Changes in Tastes (Demand)
2.1.1. Borrowers are going to borrow from other lenders
2.1.2. So to get them back through reducing the interest rate on loans.
2.2. 2-Changes in Technology
2.2.1. Technology represents cost
2.2.2. So, the more cost means increase on interest on loans
2.3. 3-Changes in Tax Rates
2.3.1. Increase in tax - increase in interest on loans
3. Impact of Economic Growth on Interest Rates
3.1. Economic growth
3.1.1. means there is more income, there is more employment the economy is doing good, and will lead to more deposits/savings
3.2. the impact will
3.2.1. increase the interest rate on loans
3.2.1.1. because there will be more borrowers who will engage in income generating projects to borrow more money
3.2.2. interest rate will be less on deposits: since there will be more
3.2.2.1. depositors, many people will deposit their funds in the bank since there is an increase in income.
4. Impact of Inflation on Interest Rates
4.1. Inflation is
4.1.1. increasing the general price level of goods and services in an economy over a period of time
4.1.2. increase in prices, the unit of currency buys fewer goods and services.
4.1.3. reflects a reduction in the purchasing power per unit of money
4.2. If there is an inflation
4.2.1. the people will borrow more from the banks to finance their consumptions, and the interest rate on loans will increase
4.2.2. there will be less deposits because people will use their savings for consumption- Interest rate on deposits will be increased
4.3. In case of increase in inflation
4.3.1. the households supply funds may reduce their savings at any interest rate level which will enable them to increase their purchases before the prices rise