• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month
  1. 1
  2. 2
  3. 3
  4. 4
  5. 5
  6. 6
  7. 7
  8. 8
  9. 9
  10. 10
  11. 11
  12. 12
  13. 13
  14. 14
  15. 15
  16. 16
  17. 17
  18. 18
  19. 19
  20. 20
  21. 21
  22. 22
  23. 23

How have interest rates changed over the last thirty years? What affects have these had on the economy and why?

Extracts from this document...


1. 2. How have interest rates changed over the last thirty years? What affects have these had on the economy and why? Contents 1. INTRODUCTION 2 2. BACKGROUND 3 WHAT IS THE INTEREST RATE 3 WHAT IS THE AIM OF THE INTEREST RATE 3 Monetary policy 3 This is the transmission mechanism - or the economic route map between changing interest rates and inflation 4 3. THE ECONOMICS OF INTEREST RATES 5 WHY DOES A CHANGE IN THE INTEREST RATES AFFECT THE ECONOMY? 5 HOW INTEREST RATES AFFECT AGGREGATE DEMAND? 5 A FEW OF THE AFFECTS THAT INTEREST RATES HAS ON THE ECONOMY 7 Housing Rates 7 Credit Card and Loan Rates 8 Spending and saving 8 Marginal efficiency of capital 9 Exchange rates 9 Balance of Payments 9 HOW INTEREST RATES AFFECT ECONOMIC INDICATORS 11 GDP 11 INFLATION 12 ECONOMIC GROWTH AND JOBS 14 UNEMPLOYMENT 15 PHILLIPS CURVE 17 Graphs to show the idea of the Phillips curve 17 4. SUMMARY AND CONCLUSION 19 5. HOW THE CENTRAL BANK CAN CHANGE INTEREST RATES 21 IS CURVE 21 LM CURVE 22 6. BIBLIOGRAPHY 23 3. Introduction In this investigation I will set out to answer these two questions. How have interest rates changed over the last ten years? What affects have these changes had on the economy? I will answer these questions by comparing changes in interest rates to changes in economic variables like inflation, unemployment and exchange rates. I will then compare what the relationship should have been in theory to what really happened in real life. I will also show how economic growth has changed as the interest rates have changed, whether it has changed as economic theory dictates and if not why. To show how it affects the economy I will look at inflation, economic growth or GDP, unemployment and use graphs to back up the economic theories. 4. Background What is the interest rate The interest rate is a figure set by the central bank to try and stimulate or slow down the growth of the economy. ...read more.


This will strengthen the exchange rate. When the pound increases against other currencies, our exports become more expensive abroad, so exporters get less money. Also foreign goods become cheaper in Britain so British products are less desirable. Imports and Exports are factors of demand so when imports go up and exports go down demand within the British economy goes down. This causes a slow down in the economy, and unemployment. Balance of Payments The balance of payments is concerned with two different accounts. These are the current account and the capital account. The current account is a record of the visible and invisible exports and imports in Britain. If British companies import more products than they export then the current account is in deficit. In the same way if we buy more of our own goods than foreign imports we will have a surplus. The capital account shows us the investment in and out of the country, It also shows us the speculation i.e. the oversees purchasing of �'s, stocks, shares etc. If we have more investment and speculation coming into the country then we will have a surplus. If we have less coming in to the country we have a deficit. The balance of payments is affected by interest rates: Firstly the interest rates can stimulate investment in the country. This is because if the rates of interest are raised then investors will get more of their money back when they invest in our banks and other companies. The change in interest rates can also change the exchange rate in the same way. More foreigners will invest and this will make the exchange rate appreciate. If the exchange rate appreciates it becomes more difficult for Britain to sell their goods abroad and in this country. This means that there will occur a deficit in the current account. So the interest rates will be lowered to stimulate the economy and the exchange rates will fall. ...read more.


The IS curve stands for investment and saving and the LM stands for liquidity and money. IS curve The IS curve shows us, for any given interest rate the level of income/output that brings the goods market into equilibrium. Taking the investment function and the Keynesian Cross and combining them constructs the IS curve. The investment function is that investment is inversely related to the interest rate. This is because if you lower interest rates then it will become cheaper to get loans and then pay them back so it's easier to then invest money into a business and make a profit on that investment. Thus an increase in the interest rate reduces the investment. On the Keynesian cross the reduction of investment shifts the planned expenditure downwards, reducing income when in equilibrium with actual expenditure. So, an increase in the interest rate lowers income and the other way round. So if you lower interest rates then you increase income/output. When you increase output you are increasing economic growth, which is measured in GDP. LM curve The LM curve is controlled by how much money there is in circulation, which is controlled by the central bank issuing and selling, bonds. When they change the amount of bonds they issue the money goes in or out of the system. If you decrease the amount of money in the system then you cause a contraction of the LM curve. When you put this into the IS-LM model you can see how this changes the interest rate. If you increase the money in circulation then you get an expansion, this can also be shown on the IS-LM curve. Expansion - increase of money This model shows that as you increase the money supply LM, the interest rates fall and the income and output increase. Contraction - decrease in money supply This model shows the opposite of the last one because as you decrease the money supply, LM through buying bonds the interest rate goes up the income goes down and you slow down the economy. 8. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. What might cause an appreciation of a floating exchange rate? Discuss whether an appreciation ...

    This could be bad for the country in the long run as consumers may get dependent on imported goods, local production may go down and then when the exchange rate falls there might be a fall in living standards. Increase in the relative prices of imports will cause a fall in the profitability of exporting overseas.

  2. An Empirical Investigation into the Causes and Effects of Liquidity in Emerging

    All bonds traded have a negative correlation with interest rates, so that an interest rate rise would cause the price of a bond to fall. Another important consideration to the focus of this paper is liquidity risk, referring to the investor's ability to sell a bond quickly and at an efficient price.

  1. Supply side policy.

    an increase in production costs and may have an adverse effect on output and employment Welfare to Work Welfare to Work is the current Labour government's flagship programme for getting people off state benefits and into work. The programme includes the New Deal - a �4 billion + scheme targeted at increasing the employment prospects for the long-term unemployed.

  2. Analysis the cost of running the UK economy in the fiscal year 2003/2004, and ...

    and corporation tax, levied in that order. Licence royalty is 12.5 per cent of the value of oil and gas landed, after allowance for the costs of treating the oil and of conveying it to shore. Royalty does not apply to fields given development consent after 31 March 1982.

  1. China or India? Many companies ask themselves this question. Due to saturated markets, increasing ...

    as well as car makers like BMW and VW. Pharmaceutical companies outsource their research for example Roche, Glaxo SmithKline and Pfizer. India is also 'a very entrepreneurial society' (Hill, 2005, 104) Risks: Political and General Instability Risks China is a communist state, with a one party system.

  2. Case Study: The Home Depot

    The social forces concerning building retailers can be separated into the following two facts: Ageing homes and baby boomers: When we take a look at the US market, near the year 2015 the number of people with the age between 45 and above is expected to reach 127 million.

  1. Chinese economy sets for soft landing in 2005.

    China's growth plans and goals are impressive, he acknowledged. But factors in the development of the global economy and major problems that China has to address could make "straight-line progress much more difficult". Among the challenges: mounting unemployment, the lack of social safety nets, the growing pressures associated with an

  2. Identify and analyse the factors which affect Economic Growth - What Methods are used ...

    The second method is the income method. The production of goods and services produces wages, salaries, profit, rent and interest. The method is realised when all of these are added. Finally the expenditure method, this measures the sales value. It focuses on the expenditure necessary to purchase the nation's production.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work