• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

What determines the rate of interest?

Extracts from this document...


What determines the rate of interest? In the UK interest rates, the base rate, gets set once a month by the Monetary Policy Committee at the Bank of England. Its sole remit is to achieve 2.5% inflation +/- 1%. Classical economics argue that simple supply and demand determines the rate of interest. ...read more.


The demand curve for loanable funds slopes downwards for the following reasons. Firstly, households will borrow more money at lower rates on interest and secondly it reflects the falling rate of return on investment as investment increases. The market will adjust to changes in supply and demand. If there is a rise in demand for capital equipment because of an improvement in technology that increases the productivity of capital, the demand for loanable funds to purchase this equipment will rise. ...read more.


This in turn will encourage more saving, the end result of which is that more money will be spent on capital equipment. It is important to mention, however, that some argue that savings do not respond to changes in interest rates because people save for a purpose i.e. to buy a house and they do not just save because the interest rate is high, thus the loanable funds theory is not necessarily an accurate description of how interest rates are determined. ...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. Review of Strong Interest Inventory.

    Scores are T scores, normed against those in particular occupation. The results of the Occupational Scales can indicate specific occupations that the participant may find interesting and the related occupations that he/she may find interesting. They can also identify the kinds of people he/she might enjoy working with, and help

  2. Exchange rate.

    The demand curve will shift from D to D', In order to buy these pounds the supply of dollars will have to rise. The supply curve in the diagram 1.4(B) shifts to the right from S to S', in diagram (A), the 'price' of the pound rises from �1 = $1.50 to �1 = $1.70.

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