What is the effect of rise of money on interest rate?


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Jack Buckby answered
If more money was to enter the economy, through a quantitative easing initiative due to a deficit or otherwise, it is probable that interest rates would rise as a result of an increase in circulating money within an economy. This would be to offset the negative impact this would have on inflation and exchange rates. It has relevance to modern economics due to the confusion regarding the recession and how it will affect those with outstanding loans.

  • What are interest rates?

Interest rates refer to the financial charges that are placed upon an amount of money that an individual wishes to borrow from a particular lender. Most often, a lender comes in the form of a bank who will provide an APR which is secured against the base rate from the central bank.

In this way, a profit can be made for the brief exchange of money however there are those who wish to abuse this money-making technique. 'Loan sharks' will often charge ridiculously large interest rates in order to make vast amounts of money and this can leave a desperate individual bankrupt. Interest rates in the UK are set by the Monetary Committee who are part of the country's central bank.

  • What is money supply?

This is a term often used within economics to refer to the amount of money stock that is actually available within a certain economy at one particular time. It includes the money held by both the general population and the banks, and it calculated by a sector of the government or a country's central bank such as the Bank of England and the monetary committee.

Quite simply, if there is a large amount of money supply, companies and the general public will retain a larger amount of wealth. This money can be spent on luxuries but, most importantly, can ensure that fewer loans need to be taken out from the banks.

Consequently, interest rates will drop as the banks wish to lure individuals to loan more money. If people believe that they can borrow money and not have to pay back a substantial amount for it, they will be more eager to do so and the banks will once again, profit.

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