Interest Rates: A Matter Of Supply And Demand
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Interest Rates: A Matter of Supply and Demand
America is driven by the economy. When the economy is unsteady, then all Americans suffer, including both business owners and consumers. When people do not feel like they have job stability spending is at a low; however, when people feel stable in their job or business and the income is steady, then people feel more comfortable with spending more money. The American way of buying expensive items, such as cars or houses is to borrow from financial institutions and pay the money back in small increments on a monthly basis, with interest of course. However, like most other products and services, interest rates fluctuate depending on the steadiness of the economy and supply and demand. Macroeconomics is the study of the economy that considers the problems of inflation, unemployment, business cycles and growth (Colander, 2004, p.12). Interest rates are classified in the macroeconomic theory.
The article, “Interest Rates: A Matter of Supply and Demand” explains the reasoning behind the rise and fall of interest rates. Robert Rickles (n.d.), in this article held, “When demand for money is high relative to supply, the price – or interest rate – goes up. When demand is low, the price comes down.” The article suggests that there are two primary drivers of interest rates. They are the health of the economy and the government monetary policy. When the economy is steady, people feel comfortable to spend money. In a strong economy, businesses anticipate more income and higher profit margins and consumers feel stable in their job and are more confident to spend money. Consumers and businesses then borrow money from financial institutions for larger purchases, such as land or homes. However, the more money that is loaned out, the less money there is for more loans. As Rickles (n.d.) explains, “Higher demand for a smaller supply [of money] is a recipe for increased interest rates.” Additionally, in a weaker economy, less people are borrowing money which is lowering the demand for money, which in turn, drives interest rates down to try and get businesses and consumers to make major purchases.
Then there is the government monetary policy, which is the other primary interest driver. The Federal Reserves or the Fed is the central bank of America. “As the nations central bank, the Fed has the daunting task of maintaining stable prices, maximizing economic growth and keeping as many people employed as possible (Rickles, n.d.). The Fed is the balance in the economy. The Fed has federal funds rate that is what the banks are charged for short term loans. The course of the economy determines whether the Fed will raise or lower the interest rates. The higher the rates, the more the costs are passed down to the consumer and businesses. “The Feds primary interest in setting the federal funds rate is keeping inflation in check; high