What is the affect of Interest rates on the economy?

Question

When interest rates are increased or decreased, how does this effect the countries economy?

Answer 1

Interest rates can have adverse or a good impact on the economy...a higher interest rate means more people would be motivated to store their money in banks which means lesser liquidity in the market which in turn is useful in curbing inflation.

On the other hand, lesser interest rates means there is less incentive to store the money in bank and rather invest the money elsewhere (as in stock market or real estates).

more money floating in the market could result in inflation (inflation - too much money chasing too few goods - where the overall prices of the commodities rises)

Answer 2

To understand the federal funds rate is the interest rate charged by banks when they loan each other by overnight. This funds rate vacillates upon to the supply and demand and would not under by Fed directed control, but strongly influenced by the Federal Reserve Action. The Discount rate is interest rate charged by the Federal Reserve when Fed Fund been released or/and borrow by other banks at overnight. This discount rate is under Fed control directly.  Federal Fund Rates is always higher than the discount rate. Generally, only large banks borrow directly from the Fed then the Discount Rate is getting a lower discount rate from Federal Reserve so these big banks would be benefited from it.) Why these fund rates and U.S Central Bank’ role is important to U.S economy and world economy, all of their decision makings and actions are have a  range affected deeply and broad that not only give U.S territory economy personally but also affect no-home come to cosmopolitan possession economy. Just saying in a comprehensiveness way, United States of America currency and monetary policies related to resolutions and action of Fed with a view to impact come to money capacity and U.S economy credits on the market. All changes about money runoff and credit will affected direct that come to interest rates. Simply responding, if credit and money supply inadequate that give reason tense to everybody’s cost of borrow will be increased therefore interest rates must ascent, and in the opposite money supply and credit are over the demand then interest rate have to beat down  the rates to encourage newly borrowers.

Good luck

QL