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Affect of Interest rate on Equilibrium in Short and Long Run - Essay Example

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Affect of Interest rate on Equilibrium in Short and Long Run

Interest rates are used as tools by central banks to control inflation. When Bank believes inflation is beginning to rise, it raises interest rates to cool the economy and vice versa. Therefore, the long term affect of raising interest rate will be to reduce inflation. For the constructers of apartments, this might mean relatively cheaper production due to cheaper cost of resources. The supply curve will therefore shift to the right (fig.4).
Constructers will be able to provide more value for the same price to the customers. Also, many of the customers who might have refused to invest in property initially when the interest price increased would now be more in terms with the market and willing to invest. In the longer run, increased interest rate would have made its impact of controlling inflation and prices for other goods would be more stable. All these factors would result in increasing the demand and would result in a shift in demand curve to the right (fig.5). ...Show more


A rise in interest rate means, borrowing and spending becomes less attractive and saving becomes more attractive. Subsequently, lesser activity is seen in the economy. For constructers of residential apartments, this would mean a decrease in demand. At this stage, it is assumed that supply and the cost of the apartments remains constant.
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Affect of Interest rate on Equilibrium in Short and Long Run essay example
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