Interest Rate in Macro Economics

Topics: Inflation, Macroeconomics, Supply and demand Pages: 3 (913 words) Published: February 24, 2013
Interest rate is the rate paid by the debtor for using the money of creditor ( 1.12.2011.). Normally, the interest rate charged by percentage of the money borrowed for a period of one year. For example, debtor borrowed £100 from the bank for one year; the interest rate of that year is 10%, then the debtor has to pay £110 to the bank after one year for using their money, the extra £10 is the interest. Moreover, the interest rate played an important role of government monetary policy. It can affect a lot of macro economy factors, such as the level of consumption and investment, inflation, exports, imports and aggregate demand (Wikipedia 3.12.2011). In this assignment, I will discuss if the UK monetary policy committee increased the interest rate, what and how it will be affected in macro economy with two different views argued by Keynesians and Monetarists.

Firstly the increase of interest rate may decrease the level of consumption. With the interest rate rising, the saving will rise; people choose to save their money because they can get a higher interest from the bank, so the consumption for other goods except financial goods like montages and other shares will fall. On the other hand, the rise for interest rate will be result of the surplus of money balances to consumer needs; they would use the extra money to buy financial products like shares and bonds (Sloman and Wride 2009). In addition, the rising interest rate will impact the foreign exchange rate to increase. The money will be more valuable than before, so the foreign products are becoming cheaper. Individuals and government will change their behaviour to import more products from outside the country for consume. Nevertheless, the export will be decreased by the changing interest rate, the domestic products turns to be more expensive than before. Consequently the net export will drop.

For the second...

References: Sloman, J and Wride, A. (2009) Economics (7th Edition). Essex: Person Education. Chapter 17-19. retrieved at 1.12.2011 retrieved at 3.12.2011
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