If the money is the building blocks of the economy; then the interest rate is the price of those building blocks. The interest rate is the cost, the firms, and the individuals, will have to pay for the use of the money, the price is expressed as a percentage of the amount borrowed. Subsequently, how much truth is in the statement that, “One’s income determines the amount one saves, but the interest rate determines how it is saved”. There are several factors that determine from economical point of view, what might incline people and firms, to save money instead of spending them; some of them are: • Demand for money • Disposable Personal Income • Propensity to Consume • Consumer Confidence Index • Interest Rates The consumer’s Disposable …show more content…
The Propensity to Consume might be influenced by many factors; one of which, could be the interest rates. Furthermore, the Demand for Money, which is the relationship between the quantity of money, that people want to hold, and some factors that might determine the quantity, dictates to a certain degree how much people save, and if they do save at all. In addition, the Consumer Confidence Index is known to be a crucial factor, determining whether there is demand for money or not; people tend to save more during recessionary gaps, expecting tough times ahead. Likewise, people tend to save less when the economy operates at its optimal state, and people are more optimistic about the future. Subsequently, we have determined why people might be inclined to save money instead of spending them on consumer’ goods. Now let’s consider how the money might be saved, so it brings in maximum return to the saver. The interest rates to a large extent, determine whether to hold cash in hand or deposit the cash in interest paying deposits, such as checking accounts, savings accounts, money market, or
What is economics? On the basis of most college courses in economics, it would be most appropriate to say something about supply and demand, those familiar curves that mysteriously set the price of goods and services. Close in relation to this are the "marginal propensity to consume" and various graphs that demonstrate the relationship between savings and investment, as mediated by the prevailing interest rates, or price of money. Contemporary economists are also fascinated by "the multiplier effect," the fact that the "effective money supply" is always much larger than its foundation in reserves, such as gold. The answer, in other words, is always that money lies at the heart of economics. Value equals price; that is, the value of anything is determined by market conditions. In thi...
People tend to try and predict what their future needs will be in order for them to be able to satisfy their current and future wants. The two-period model of intertemporal choice tries to interpret based on the current time period (e.g. this month) and a prediction of the future time period (e.g. next month) what consumers will be able to spend, borrow or save according to their levels of income and interest rates. In this assignment however we are mostly concerned on the changes of interest rate and specifically the impact an increase in the level of interest rates would have to consumers who are either savers or borrowers in the first period and how would that affect their consumption levels.
Open market operations directly affect the money supply through buying short-term government bonds (to expand money supply) or selling them (to contract it). Benchmark interest rates, such as the LIBOR and the Fed funds rate, affect the demand for money by raising or lowering the cost to borrow—in essence, money's price. When borrowing is cheap, firms will take on more debt to invest in hiring and expansion; consumers will make larger, long-term purchases with cheap credit; and savers will have more incentive to invest their money in stocks or other assets, rather than earn very little—and perhaps lose money in real terms—through savings accounts. Policy makers also manage risk in the banking system by mandating the reserves that banks must keep on hand. Higher reserve requirements put a damper on lending and rein in inflation.
Even though most of us may not realized it, interest rate actually play an important role in our everyday lives due to its great effect on the buying power. For instances, if the interest rate is higher, people tend to reduce their spending and rather save it in the deposit account due to the large interest that they can gained. However, if the interest rate is lower, they rather spend it than keeping it in the deposit account. The reason for this is because the ups and down of the interest rates have a significant impact on their personal income. Furthermore, since interest rate have a major impact on investment it is important for the investors to keep track on these interest rate’s trend before making any decision.
...financial education for their workers to increase their awareness as well as contribution for their retirement. This is due to financial information played a significant role in increasing contribution rate (Robert Clark and Schieber, 1998). Insufficient knowledge concerning the retirement savings process will enable the individual to make any optimal decisions regarding retirement savings. People can obtained information and make decision through socializing with others. There are researchers who believed that highly social people may be more likely to invest for their future saving (Bailey, Jeffrey J. Nofsinger, John J. and O’Neill, 2003). A study suggested that peer effects may be an important determinant of savings decisions. Their paper showed that peer effects are another source of extra-economic influence on people’s decisions (E. Duflo and E. Saez, 2002).
A lot of lessons have been learned this past decade. The biggest lessons Americans have learned about is how to save money, to be more money savvy and not to keep our heads buried in the sand. In truth, we are saving more than ever before, or at least trying to. We, however, have many hurdles and ills i...
Consumer spending has held up not because incomes have risen, but because consumers have taken on more debt, mostly by borrowing against rapidly rising housing prices. The marginal propensity to consume is affected by consumer confidence and interest rates as they affect the rate of return on savings.
Interest rates and the effects of interest rates on the economy concern not only macroeconomists but consumers, savers, borrowers, and lenders. A country may react and change their interest rates, according to the prosperity of their economy. Interest rates, is the percentage usually on an annual basis that is paid by the borrower to the lender for a loan of money (Merriam-Webster). If banks decided not to use interest rates, it would be impossible for others to be able to take out loans and therefore, there would be far less spending money in the economy. With interest rates, this allows banks to take a percentage of the consumer’s money and loan it out to others, thus allowing economic growth to be possible. Interest rates also allow lenders to have a “safety net” which is necessary because there is a possibility that the borrower would be unable to pay back a loan to the bank. A nation’s interest rates can be raised or lowered and these shifts in interest rates correlate directly to aggregate demand. Aggregate demand, is the total demand for final goods and services in an economy at a given time (Business Dictionary). A nation uses interest rates for economic growth or to help prevent inflation. When economic growth is needed a nation would lower their interest rates. However, if a country is concerned about inflation, they may choose to raise their interest rates. When interest rates, raised or lowered, will have a negative or positive impact on consumers, and have a positive or negative impact on investors.
One factor is the increase of income rate. As the diagram shows below, it results the demand curve shift from D to D1. When people get more income, more money will be available for them to spend. Since the purchase power of customers improves, the demand of them increases as well. Make luxury handbags as the example. If a woman earns five hundred pounds per month, she may not be willing to buy a handbag in expensive price because she need to keep life going. But if this woman gets a higher salary of one thousand pounds or even more per month, or she wins a lottery in big amounts, she will be more willing to buy a luxury handbag. Thus the demand of luxury handbags will increase. As the movement of demand curve a shortage will occur. A new equilibrium will appear until the price moves from P to P1. And the quantity will rise from Q to
The Life Cycle Hypothesis’ (LCH) use of empirical findings bridges individual and national savings to the effects of fiscal and monetary policy, and macroeconomic wealth. The LCH presents an alternative approach to saving behavior. Individuals maximize the utility of their future consumption through consumption smoothing. Quintessentially, savings is a medium used to ensure a consistent standard of consumption in each stage of the life cycle. In a steady state a positive relationship exists between savings and capital. However, during business cycle fluctuations, for example, The Great Depression, “over saving” reduced consumption, and investment, creating excessive unemployment and low levels of output. In a postwar era, it was assumed
Many students in grade school don’t obtain money very often because they do not have a steady income, so they are prone to spend the money they get. For example, if a student gets money for a holiday, the first thing that comes to mind is to spend it on something they want because they are not used to having money. They don’t know the next time they will get more money so they don’t see the importance of saving. Since there would be a constant income a student will see the effect of saving because their amount of money would constantly be increasing which will motivate them to keep saving. If students learn how to save while they are younger they will be more successful in life, and they will also have that money to use when they graduate.
These people are called the planners. They are the best type of financial personality. The planners plan their savings, financial goals, and understand the value of a budget. This attitude is a healthy attitude towards money and usually people who practise financial planning, they will be able to steer clear of debt and be on their way to achieve financial success or have already achieved it. There is a quote that states the importance of managing and planning. “Planning is bringing the future into the present so that you can do something about it now,” by Alan Lakein. The quote means that whatever we are planning now, we are actually contributing to the future. Thus, financial planning is one of the basic and excellent attitudes people have towards
Saving money will help someone in the future b providing the feeling of security. Usually someone will save money for a certain goal in life. Therefore the first step is test goal for the certain amount on money you need to save. Setting goals can be short-term goals can be usefully can analysis the amount you have to pay at the moment. Saving money doesn’t mean refraining from buying what you love. Are you wanted to buy new clothes or even a house doesn’t hesitate to make that purchase. However take in to account the down payment and compare costs. Being able to plans and set goals on certain can help save a small amount thus accumulating over time. Long –term saving can be a little harder and takes dedication and time. Saving an up a certain a...
In my conclusion, it is very important to save for the beneficiary of the upcoming future. Simply setting aside a percentage of the income received each paycheck will be the backbone to an unexpected situation. Emergency reasons, retirement, and luxury spending can all be obtained if one is mindful of their spending. Money is the biggest cause of stress in America today and mindful everyday spending can lead one to experience real financial freedom. The earlier an individual begins to save in life, the more financially stable they will be in their
When growing up, I heard over and over from my parents to save my money. Most times this was encouraged in order to ensure that I wait to spend my money when I needed it. Although this was a main concept that I heard while growing up, it seems as though in today and age, saving is not the right way to go. There are many opinions about the idea of people saving their . The economist illustrates their opinion in the article “The Bias against saving” by Buttonwood. In this article, the main idea is the thought that individuals should be saving because those savings are needed to spread among other places in the economy.