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Providing in depth understanding on interest rates and how they Link to other sub topics such as inflation and exchange rates!
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INTEREST RATESCREDIT – borrowing money that is owed to others for a period of time.
Credit is useful for business as it helps them to grow and expand.
For Customers as they can spend more.
This all supports economical growth.
Examples of Credit- loans, trade credit, overdrafts, mortgages.
THE CREDIT CRUNCH HISTORY – 2008
There was a huge global financial crisis, due to collapse of housing market,
impacting the banking and finance sector.
Led to banks become hesitant to lend money, causing a downturn in the
economy.
Leading to businesses and individuals facing difficulties in obtaining credit
and businesses and customers took longer to pay their bills.
This lead to significant tightening of credit through increasing interest
rates to 0.5%
Interest rates - The cost of borrowing or the returns made on an investment
Borrowers Savers
Business or individual borrows Business or individual put
money, they usually have to pay savings into a bank account, they
interest on top of their loan. expect to receive interest.
Interest rates INCREASE Interest rates DECREASE
BUSINESSES Discourages future investment Encourages businesses
(firms who sell opportunities as the cost of to invest as the cost of
things) borrowing increases. borrowing is cheaper.
Businesses tend to More sales from
slowdown in customers for
growth/stop/shrink/go product/service –
bust! customer spending
Less sales from customers for increases.
their product/service – Existing depts may have
customer spending declines. decreased with interest
Existing dept cost more with repayments.
interest repayments.
CUSTOMERS Individuals/businesses with Individuals/ businesses
(people who savings will save more as they will save less during this
buy things) benefit from having higher period as they have less
returns on savings. rewards on savings.
Spend less Spend more
Tend to borrow less as the cost Tend to borrow more as
of borrowing is higher. the cost of borrowing is
Customers spend less cheaper.
(only spend on inferior Demands for
goods). goods/service
Existing depts cost more to increase
service – spending decreases especially luxury
goods.
Existing depts cost less
to service – incomes
increase so spending
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