Interest Rate Effect
Definition
The interest rate effect refers to how changes in interest rates affect borrowing costs and investment decisions. When interest rates decrease, it becomes cheaper for businesses and individuals to borrow money, leading to increased investment and spending.
Analogy
Think of interest rates as the price tag on borrowing money. When there's a sale with lower prices (lower interest rates), more people are motivated to buy things they need or want because it's more affordable.
Related terms
Monetary Policy: Actions taken by central banks to manage interest rates and control inflation in an economy.
Investment Spending: Expenditures made by businesses on capital goods like machinery, equipment, or buildings.
Loanable Funds Market: A market where borrowers (demand) seek funds from lenders (supply) through loans or investments.
"Interest Rate Effect" appears in:
Study guides (1)
Practice Questions (1)
Are you a college student?
Study guides for the entire semester
200k practice questions
Glossary of 50k key terms - memorize important vocab
Resources
© 2024 Fiveable Inc. All rights reserved.
AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.