Interest Rates

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  • Interest Rates
    • the reward for lending savings to somebody else e.g. a bank and the cost of borrowing
    • Economic effects of Higher Interest Rates
      • Increased cost of borrowing
      • Increase in mortgage interest payments
      • increased incentive to save rather than spend
      • Increase value of the pound
      • Fall in consumption and investment
      • Reduced confidence
      • increase the cost of government interest payments
        • Could lead to higher taxes in the future
    • Economic effects of Lower Interest Rates
      • Less incentive to save
      • Cheaper to borrow so borrowing increases
      • lower mortgage interest payments
      • Rising asset prices
        • Lower interest rates make it more attractive to buy assets like housing.
          • This will cause a rise in house prices and therefore rise in wealth.
            • Increased confidence and consumer spending
              • Economic effects of Lower Interest Rates
                • Less incentive to save
                • Cheaper to borrow so borrowing increases
                • lower mortgage interest payments
                • Rising asset prices
                  • Lower interest rates make it more attractive to buy assets like housing.
                    • This will cause a rise in house prices and therefore rise in wealth.
                      • Increased confidence and consumer spending
                  • Depreciation in the exchange rate
                    • A fall in the exchange rate makes UK exports more competitive and imports more expensive. This also helps to increase aggregate demand.
        • Depreciation in the exchange rate
          • A fall in the exchange rate makes UK exports more competitive and imports more expensive. This also helps to increase aggregate demand.

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