For week ending Friday, 9/24/10.
How does the setting of interest rates by banks control the macroeconomy?
Thursday, September 16, 2010
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Welcome. This is a blog dedicated to the students enrolled in the CSHS AP Economics classes. Click on the title of the article, read, and click comment.
I used to go to the bank with my dad (I still do) to buy CDs. I remember the interest rate used to be at 2.4% but now it's 0.7%, which is pathetic. The setting of interest rates by banks could affect the flow of money in and out of the economy. If the interest rate is too low like now, it would really discourage peole to buy CDs because most people would rather put it in their safety box to avoid having to pay taxes for it. This could create a shortage of money during time of needs for those who wants to start a business and etc. This in turn would affect the economy as a whole.
ReplyDeleteI agree with Tuyet that if there is pathetic interest rates, it will discourage people to invest their money into banks which in turn discourages the banks from lending money, given that they have a shortage of it. This effects the growth of small businesses which is a key to our economy since small businesses hire people who get paid and in turn, more money.
ReplyDeleteFrom the article, it seems that interest rates have a large affect on the economy in the sense of how much money is being saved rather than borrowed and used. The low rates discourage saving (as both Tuyet and Jon have stated), maybe in the hope that people will invest the money back into the economy? Either way, the interest rates affect the overall national economy and proportion of money saved, borrowed, and spent.
ReplyDeleteThe setting of interest rates by banks affects our economy because it pretty much controls the flow of money. While banks are looking out for how they can make the most profit, they are also affecting how much we invest and how much we don't. With low interest rates, it is obvious that people will hold onto their money and perhaps find other uses for it. High interest rates, on the other hand, encourage people to put their money into banks. This will never be balanced, though, because banks will always do whatever they can in order to end up with more money in their pockets, without ever considering the consumer.
ReplyDeleteI think that the banks do consider the consumer because they know that the most effective way to make money is to watch the economy and consider the consumers next move. The reason interest rates are low now is because a lot of loans were not being paid back to the banks. When the banks cannot trust the consumer to pay back loans, they no longer have much motivation to attract ore deposits by raising the interest rate. Just as the interests rates by banks control the macroeconomy as mentioned above, the macroeconomy will control the interest rates set by banks.
ReplyDeleteThe setting of interest rates by banks controls the macroeconomy in terms of when there is to much money in the economy the interest rates are raised less loans are taken and borrowing is discouraged, when there isn't enough money out there the interest rates are low to encourage the borrowing and get even more money out there.
ReplyDeleteThis article highlights the delicate relationship the economy shares with the banking system and how those two entities establish techniques that maintain a balance of money in the economy. If consumer spending and/or borrowing changes (whether an increase or a decrease) than the banks will use that specific method and lower or increase interest rates, depending on the situation at hand, in order to maintain that desired equilibrium.
ReplyDeleteBanks setting interest rates do affect macroeconomics. This can be done by the raising and lowering of interest prices. If interest prices are raised then most likely people will take a good portion of their money out of the economy to put into a bank, so that the economy has a sense of balance, and isn't in this huge upturn. Although, when the economy isn't performing very well, then the banks will lower interest prices. This causes people to go put their money out into the economy because letting the money collect interest isn't very effective to them anymore. By changing the interest rates the bankers can help keep a sense of balance in the economy.
ReplyDeleteBanks setting high interest rates would discourage people to put their money in the bank. Instead, people would much rather keep their money at home. High interest rates means that people would lose more money. People, like my parents, find out and calculate how much interest something is. When the rates are high, people usually don't buy that item or put their money in banks (ex.buying a car). Overall, interest rates affect the macroeconomy by basically giving the people options, buy it or don't buy it, put their money in banks or don't.
ReplyDeleteThe macroeconomy is affected by the setting of interest rates by banks by the fact that our economy fluxuates; so do interest rates. Banks who are trying to keep themselves above water in a drowning economy will in turn lower the interest rates of CDs. This leaves people with CDs disgruntled and unwilling to invest in more, and deters those planning on investing in CDs from doing so. This lack of investment leaves the banks without money to borrow from their customers which means they will have to borrow from somewhere else like the federal reserve. This prolonged borrowing of federal funds leaves the economy no financial foundation to build on in order to return to equlibrium.
ReplyDeleteThe setting of interest rates definitely affects the macroeconomy. Interest rates tend to encourage/discourage people from investing their money, as stated by several others already. The lowering of interest rates discourages people from investing in their banks due to the fact that they will get a lower return, while a rise in interest rates would defintely provide an incentive for people to invest.
ReplyDeletethe setting of interest rates by the bank has a large effect on the consumer because in a good economy, interest rates is raised. however, in our current economic state, interest rates are very low prompting people to use other means to accumulate money, possibly keeping it to themselves. and although this seems like a good alternative for the consumer, it means that there is less money in the market as a whole.
ReplyDeleteThe setting of interest rates by the banks controls the macroeconomy by either encouraging or discouraging borrowing or saving. If interest rates are raised then the population will begin saving their money so that they can collect the interest. However, if the interest rates are decreased then there is less of a benefit in saving their money so they will begin borrowing and investing. The economy is then flooded with money.
ReplyDeleteThis information is merely indicative of the ever-lasting monetary pendulum. As the Fed releases or buys up money from the economy, banks behavior's fluctuates in response to greater profit margin. This behavior is integral to the success of the free market because it allows the self-regulation of money supplies and interest rates with minimal government intervention. Heavy manipulation by the Fed can eventually lead to massive variations in market interest rates and lower the confidence of consumers and investors.
ReplyDeleteWhen banks set high interest rates this affects the overall economy because people don't want to put their money in the bank when they're suppose to be "investing" and not losing money due to high interest rates. If people don't put their money in the back and instead leave it at home, this has a great impact on the market because less money is being put out and this is a deterimental thing especially in our state of economy.
ReplyDeleteThe bank, in the end, plays a huge role in macroeconomics. By being able to set interest rates they are able to accrue vast amounts of money by being able to give consumers incentives to put their money into an account. It is this ability which governs the overall state of the economy and furthermore allows the banks to wield vast amounts of power.
ReplyDeleteThe setting of interest rates by banks control our nation's economy because depending on what the interest rate is, we as consumers will fluctuate in spending and depositing money. Also, the interest rates set by the banks determine how much money are going to be circulating in the economy because citizens will either store the money in their savings account(high interest rates) or invest the money into something(low interest rates).
ReplyDeleteThe setting of interest rates by banks controls the macroeconomy by manipulating consumers' behaviors. If the interest rates are low, consumers will see no advantage in investing their money in CDs or savings accounts since the profit is very low and they still have to pay taxes for the investment. On the other hand, if the interest rates are high, consumers will want to invest their money in CDs and savings accounts. In the end, the consumers' actions will affect the economy by indirectly regulating the cash flow.
ReplyDeleteThe federal functions of releasing or absorbing money in the economy impacts the way banks determine their interest rates. When the Fed buys up money, interest rates increases to discourage borrowing within the market. As the Fed releases money and decreases interest rates, borrowing and spending of money is encouraged. These processes allow for a fluctuation of money flow within the economy at a large scale.
ReplyDeleteI need to stop doing these on Sunday nights because I have nothing original to say. Like pretty much everyone else said, the economy revolves around consumer spending and production. Consumer spending is based on how much money they make and have saved. At this point in the market, interest rates are disgustingly low, to the point that people are losing money by purchasing CDs and investing money into savings accounts. The best option is to get yourself a nice piggy bank these days. This influences the macroeconomy because people are losing confidence in the bank and they are indirectly controlling cash flow.
ReplyDelete