interest rates

Topics: Monetary policy, Inflation, Federal Reserve System Pages: 2 (430 words) Published: March 8, 2014

Money Banking and financial Markets,
Interest Rates
An interest rate is the rate at which interest is paid by borrowers for the use of money that they borrow from a lender. Specifically, the interest rate is a percent of principal paid a certain amount of times per period. Small companies often borrow capital from banks to buy new assets for its business, and in return the lender receives interest at a predetermined interest rate for deferring the use of funds and instead lending it to the borrower. Interest rates are normally expressed as a percentage of the principal for a period of one year. Interest-rate targets are a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment. The central banks of countries generally tend to reduce interest rates when they wish to increase investment and consumption in the country's economy. However, a low interest rate as a macro-economic policy can be risky and may lead to the creation of an economic bubble, in which large amounts of investments are poured into the real-estate market and stock market. In Japan, late 1980s and early 1990s, they experienced large unpaid debts to their banks and the bankruptcy of these banks and causing stagflation in the Japanese economy (Japan being the world's second largest economy at the time), with exports becoming the last pillar for the growth of the Japanese economy throughout the rest of 1990s and early 2000s. The same scenario resulted from the United States' lowering of interest rate since late 1990s to the present (see 2007–2012 global financial crisis) substantially by the decision of the Federal Reserve System. There are however some countries who have used the power of interest rates to ensure stability in their economy. In the United Kingdom, former Prime Minister Margaret Thatcher during her reign learnt from the mistakes of former United Stated President George Bush...
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