The global economy--answer all three questions - Essay Example

With growing or declining market rates, which are dependent on demand for funds or economic conditions, interest rate is changing respectively. There are many differences between official cash rate and the market rate of interest. Nevertheless, relation between these two rates determines a special influence exerted on the economy of the country. Cash rate is also known as interest rate paid on overnight funds. Business cycle is under a strong influence of interest rate. Changes are sent to other interest rates in the economy and economic activity is under the influence of interest rates changes.

Changes in the cash rate exert influence on interest rates in the economy. Nevertheless, some rates are not subjected to external influence from other rates. There are different options for interest rate changes and movements. It can be claimed that market rates are quick and complete in the markets. From another perspective, there are numerous cases of regression and the coefficients of cash rate change are less than one, as a rule. Maturity of security can be defined in the following way: “the long-run pass-through coefficient and the coefficient on the cash rate in the "levels" regressions are positive for all three rates, but the size of the coefficients declines the longer is the maturity of the security” (Wylie, 2009).

It is possible to define the measure of governmental bonds over a certain period of time and the rates of maturities should be correlated during different periods. It is evident that the interest rate, when decrease, exerts a serious negative influence on consumption and investment expenditures, as well as the level of aggregate demand, the inflation and the unemployment rates. This influence can be interpreted in the following manner: when there is a price increase, borrowing is decreasing.

When the price is decreasing, the effect is quite different. Borrowing increases in this case at once. Consequently, it is evident that changes in