Business Economics Interest Rates and Coupon

Question: Critical analysis is an important test of the students ability to evaluate business economics concepts. Introductions and conclusions should briefly address the issues to be discussed and discussed respectively. Answer: Introduction: The main theme of the article features the effects and the reasons for lower interest rate in the economy of Britain over the last seven years. There are difficulties and challenges faced in the financial market, as the low interest rate is constant in the bygone years (Baaquie 2012). Some central banks are concerned about pumping more funds in the economy through the program to lower the rate of interest and escape from the adverse effect. Interest rates are expressed for a single period or different periods. When the rates are low, the economy is seen to boost in the short run. Apart from the low interest rate effects, the policies for the betterment are also considered. Impact of lower interest rate in UK: Interest rate is the percentage of the principle that is paid to the lender by the borrower with a definite time. The policies related to the interest rate are governed by the Central bank of the country. The following are the effects noticed in the economy of UK due to lower interest rates. Due to lower rate of interest, the incentive to save reduces. The means there is lower amount of investment. This will lead to consumers to spend more money than keep it in the bank, which would earn lower yields (Blanchard and Johnson 2013). There are cheap costs of borrowing and it encourages the firms and the consumers to take the loans to finance big investments (Hubbard, O'Brien and Sharma 2012). A fall in the rate of interest reduces the payments and the cost of mortgage. Thus, the consumers will have more disposable income to enjoy (Hubbard and O'Brien 2012). When there is lower interest rate, there are more people available to buy the assets. The customers will be motivated to spend more when there is rise in wealth and prices of houses (Cuny, 2012). When there is fall in the rate of interest, the country get lesser attractive than the other country. This will not motivate the people to invest in the economy. With lower demand there is fall in the exchange rate. The Use of the Aggregate Demand and Aggregate Supply Model for Macroeconomic Interpretation: The model of AD and AS has been used to discuss the macroeconomic interpretation. With the fall in the rate of interest, there would be rise in the AD. AD is the sum of consumption, investment, export and imports (Mankiw 2012). There is an inverse relation of investment to the rate of interest. Thus, when there is a fall in the rate of interest there is a rise in the level of investments. This would help in increasing the consumption of the individuals. Thus, there is a rise in the Aggregate demand in the economy. The diagram below shows the effect of the lower interest rate on the AD and AS curves. There is rise in total demand, which causes a shift in the AD curve from AD to AD2. The price level falls from P1 to P2. Thus, it can be said that the real GDP of the economy rises and ultimately the rate of inflation increases (Mankiw 2012). Figure 1: (Source: McTaggart, Findlay and Parkin 2012) When looking into the economy of Britain that faces a low rate of interest over the seven years is could be seen that the low interest rate induces inflation index Several factors are affected by the lower interest rate in the economy. The factors are as follows: There is a boost to the short run macroeconomic parameters. As per the economists, the abrupt boost helps in gaining within that time but the boost is reduced by the rise in the rate of inflation (McTaggart, Findlay and Parkin, 2012). There are more money spent by the people for the consumption of the goods while delay is done by the lenders for the consumption of the newer products There is a choice for the lender to invest money on goods People are seen to prefer more of other forms of money rather than liquid form As per the economic state in the country, the interest rate is seen to fluctuate. The following diagram shows the trends in the inflation rate due to the presence of lower interest rate in the year 2009 that was actually because of the high economic growth and also due to the presence of other factors involved (McTaggart, Findlay and Parkin 2012). Figure 2 (Source: Walters 2012) Figure 3 (Source: Walters 2012) Expectation from the Central Bank of the country: There are some points that are seen regarding the policies of the central bank and lower interest rate in UK. The points are as follows: When there is cut in the base rate by the Central bank, this is not supposed to be passes on to the consumers (Perloff 2012). For example in the year 2008-2009, there was shortage of liquidity in the banks wanting for more deposits. Thus, the interest rate cut of 0.5 percentages were not able to affect the banks to reduce the rate of interest and this has hardly influenced the consumers. The fall in the interest rate should lead to higher levels of economic growth. There is however, probability of some factors, which led to depression in the economy. One such reason was the global financial crisis. Though there was lower interest rate level, the banks were not agreeing on providing of loans. An example of this was during the global recession of 2008 when there was lowering of mortgage availability. This will prevent the people to get lower rate of interest from the banks (Walters 2012). Due to the presence of lower rate of interest, people are unwilling to borrow. When there is cut in the rate of interest, people are seen to be confident enough to spend more. The reports of 2008 confirm there is high savings ratio during the time of recession. During the time of deflation, the people are seen save due to high interest levels. There is different impact of lower interest rate on the different groups and societies: The borrowers and the homemakers are benefited from the lower interest rates as they have opportunity to spend more The savers are affected due to the lower interest rates. An example for this is the group of retired people. When there are too many savers present in the economy then the lowering of the interest rate will reduce the overall income in the economy. In case for economy of Britain, the fall in the interest rate would have a huge impact as there would be high proportion of whom rather than buying is seen to rent. The current account balance concept also needs to be considered. The concepts are as follows: When there is lower rate of interest rate, the consumers are able to spend more. The proportions of the imports are seen to rise. This would lead to fall in the current account balance. The lower level of interest rate is also a cause of depreciation in the rate of exchange, which make the exports quite competitive. When there is relative elastic demand, a lowering of the rate of interest would lead to improvement in the current account. This would lead to no effect on the current account balance. The Model Of Loanable Funds Market Interpreted Through Macroeconomic Perspective: The microeconomic perspective of the lower interest rate is discussed in this section. The change in the rate of interest is considered as the microeconomic demand and supply concepts where the price of the good can be referred to as the interest rate. This is explained through the firms behavior. The market of loanable funds is considered where the demanders are the borrowers and lenders are the suppliers of the funds. The behavior of the firm depends on the net value that is dependent on the interest rate. When there is lower interest rate, the firms are willing to take more amount of capital. This means there is more demand for the loanable funds. If there is higher interest rate, the capital demanded is also less. The demand for funding falls as there is high interest rates. There is a downward sloping curve for demand for loanable funds (Zopounidis, Pardalos and Baourakis 2012). This implies there is an inverse relationship of interest rate and capital. Lenders are the fund supp liers the future availability of the funds is decided by them the decision is complicated for the firm. It is generally seen that the higher interest rate the loanable funds are attractive. Figure 4 (Source: Zopounidis, Pardalos and Baourakis 2012) The changes in the demand for capital and loanable funds have been discussed. The effect of the changes in the interest rate is shown. When new technology is adopted then interest rate rises from by the amount r (McTaggart, Findlay and Parkin 2012). Conclusion: This article is on the lower interest rate in the economy of Britain over the seven years. The rate of interest is the one that is paid by the borrowers to use the money that is taken from the lenders. The literal meaning is that it is a percentage of the principal that the borrower pays number of period. The consumer preferences changes over the lifetime so the decision of the consumers are confusing. The consumers are seen to hold lesser money when interest rate falls. Savings is also seen to fall for completing the need of the present. The central bank needs to increase the rate of interest in terms of macroeconomic parameters. The studies have shown that the lower interest rate increases inflation and GDP of the economy. References: Baaquie, B. (2010).Interest rates and coupon bonds in quantum finance. Cambridge, UK: Cambridge University Press. Blanchard, O. and Johnson, D. (2013).Macroeconomics. Boston (Mass.): Pearson. Cuny, P. (2011).Secrets of the Kingdom Economy. Shippensburg: Destiny Image, Inc. Hubbard, R. and O'Brien, A. (2012).Microeconomics. Harlow: Pearson Education. Hubbard, R., O'Brien, A. and Sharma, A. (2012).Macroeconomics. Harlow: Pearson. Mankiw, N. (2012).Macroeconomics. New York: Worth. Mankiw, N. (2012).Principles of microeconomics. Mason, OH: South-Western Cengage Learning. McTaggart, D., Findlay, C. and Parkin, M. (2012).Macroeconomics. Frenchs Forest, N.S.W.: Pearson. McTaggart, D., Findlay, C. and Parkin, M. (2012).Microeconomics. Frenchs Forest, N.S.W.: Pearson. Perloff, J. (2012).Microeconomics. Boston: Pearson Addison Wesley. Walters, A. (1998).UK interest rate policy. 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