Interest Rates And Monetary Policy

1712 WordsMay 23, 20167 Pages
An interest rate is the amount of profit that is earned over a period of time, the amount of interest acquired is proportional to how much is lent or borrowed. Interest rates give incentives for business and banks to borrow and lend money in order to stimulate the economic activity in any given country. Institutions lend money to borrowers up front in order to receive more money in the future. Some factors to consider when dealing with interest rates are the currency of the amount that is lent and borrowed, the residual term, and the default probability, or the probability that a borrower will not satisfy their debt obligations. Interest rates are extremely important in monetary policy, which is an economic process that has a specific…show more content…
Raising the interest rate is one of the most common measures taken by the government to fight high inflation. The price level is typically examined through a "basket of goods" approach, where a collection of consumer-based goods and services are used in aggregate; changes in the aggregate price over time will push the index measuring the basket of goods higher. Weighted averages are used rather than the geometric means. Price levels provide an insight of prices at any given time, making it possible to review changes the grand price level over a period of time. As inflation rises, or falls the consumer demand for goods is also affected, which leads general production measures like gross domestic product (GDP) higher or lower. Price levels are one of the most used economic indicators in the world; it is widely believed that prices should stay not be unstable from year to year so as not to result in inflation. If price levels start to rise quickly, central bankers or governments will look to decrease the money supply or decrease the aggregate demand for goods and services. Price levels are crucial in understanding the economy of any given country. The United States for example has reported that “The Producer Price Index for final demand rose 0.2 percent in April, seasonally
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