Rate of interest Effect

Rate of interest Effect - Both households and producers...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Rate of interest Effect: Rate of interest is also a price like all other prices of goods and services. It is the price paid for the use of money or for the use of loanable funds. Rate of interest also shows a tendency to move upward under inflationary conditions or rising prices. With rising price level and with a constant supply of money, there is an increased demand for liquidity or money and credit resources. This is because the rising price level reduces purchasing power of money. Hence a greater quantity of money is needed to carry out a given volume of transactions.
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Both households and producers create an increased demand for money under conditions of rising price level. Consequently, with constant supply, growing demand for money tends to raise its price in the form of rate of interest . With higher rates of interest, borrowing becomes dearer and the tendency to save rather than consume is induced. Consequently demand for goods and services both from consumers and investors starts declining. Therefore a rising level of prices results in a fall in the aggregate demand due to a rise in the rate of interest....
View Full Document

This note was uploaded on 11/17/2011 for the course EC ec 201 taught by Professor - during the Fall '10 term at Montgomery.

Ask a homework question - tutors are online