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MBA Business and Economic Evironment
Pages 4 (1004 words)
Interest rates can be defined as the cost of borrowing money over a period of time, interest rates are usually agreed upon as a percentage of the original sum of money for a specific period of time. This happens because when someone is willing to lend their money, they part with it for that specific time period and hence there are opportunity costs of borrowing money and also because money looses its value over a period of time and hence to make sure that the lender does not lose out interests rates are used.
As the interest rates change, so do the spending and saving patterns of the people. When interest rates increase the cost of borrowing money increases and hence people borrow lesser where as when there is a decrease in interest rates people are more inclined to borrowing money because the cost of borrowing is lower. This affects the aggregate demand and aggregate supply of a country because money is the basis of all transactions that take place in an economy and if the cost of borrowing money decreases the money demand in the economy would tend to increase and people will be more inclined to spend that money and hence the aggregate demand would increase and this would lead to more people being employed if the economy is not already operating at optimum level of productivity. On the other if interest rates tend to increase then the cost of borrowing increases and people are not willing to borrow, hence the aggregate demand for the economy would decrease and the would have adverse effects on the labor as well. ...
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