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MBA Business and Economic Evironment - Essay Example

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Interest rates can be defined as the cost of borrowing money over a period of time, interest rates are usually agreed upon as a percentage of the original sum of money for a specific period of time. This happens because when someone is willing to lend their money, they part with it for that specific time period and hence there are opportunity costs of borrowing money and also because money looses its value over a period of time and hence to make sure that the lender does not lose out interests rates are used…
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MBA Business and Economic Evironment

Download file to see previous pages... As the interest rates change, so do the spending and saving patterns of the people. When interest rates increase the cost of borrowing money increases and hence people borrow lesser where as when there is a decrease in interest rates people are more inclined to borrowing money because the cost of borrowing is lower. This affects the aggregate demand and aggregate supply of a country because money is the basis of all transactions that take place in an economy and if the cost of borrowing money decreases the money demand in the economy would tend to increase and people will be more inclined to spend that money and hence the aggregate demand would increase and this would lead to more people being employed if the economy is not already operating at optimum level of productivity. On the other if interest rates tend to increase then the cost of borrowing increases and people are not willing to borrow, hence the aggregate demand for the economy would decrease and the would have adverse effects on the labor as well. An increase in the interest rates in Australia would definitely have the same effects as well and a decrease in aggregate demand is expected.

Industrial point of View:
If the interest rates are increasing the cost of borrowing for industries would go sky high because industrialists require huge sums of loans because of the industry and the operations that they need to carry out. A very important decision for the firms is based on the interest rates and their trends, the question is: to expand or not to expand The answer lies with the interest rates, if they are very high then the company might postpone their expansionary plans but if they are lower and within a safe limit then the company can go and expand. This applies to whole industries, if industries expand there would be much more labor required and there would be an increase in employment leading to an increase in aggregate demand. Hence if any government is looking to give a boost to its industrial set up it should take special care when dealing with interest rates because it might charter the course of a whole industry and any industry is important to the economy because it has a lot of other units such as labor and exports dependent upon such industries, though some governments have come up with industrial interest rates but still they serve the same function.

Exchange Rates:
The exchange rates of a country play an integral part in determining where the country is heading in the near future and also has far reaching consequences in policy making. Interest rates play a very important role in determining what a country's exchange rates would be, in fact they are also a tool to tamper with the exchange rates. If the interest rates are increasing in an economy, ceteris paribus, then there would be an inflow of foreign currency into that country because people would want to save their money in that country's banks because that would give them a higher return on their investments, when this takes place the demand for a country's currency on the foreign exchange market increases. On the other hand if the interest rat ...Download file to see next pagesRead More
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