Solution
Komalavalli answered on
Apr 10 2021
Why are interest rates generally so low at present?
Contents
Introduction: 3
Saving-investment equili
ium models: 3
Demographic trend and interest rate: 5
Technology trends and interest rate 5
Globalization and interest rate: 6
Negative interest rate and its implication 6
Impact of Covid 19 on Australian economy 7
Introduction:
The interest rate is a key macroeconomic variable that is used to observe the state of the economy. This composites two functions, the cost of bo
owing, and the return on savings. Investing often requires the use of bo
owed money, the cost of bo
owing is expressed through the interest rate, whereas the return on savings is similarly represented through the interest rate.
The nominal interest rate is the interest rate before co
ecting for inflation. The nominal interest rate differs from the actual interest rate in terms of inflation adjustment and the efficient interest rate in terms of compounding adjustment.
Nominal interest rates may be influenced by a variety of causes, including capital demand and supply, federal government activity, central bank monetary policy. The short-term nominal interest rate is used by central banks as a monetary policy instrument. For example,
The interest rate is reduced during a downturn to influence spending and consumption, whereas during an upturn the interest rate is increased to deter high spending and to reduce inflationary pressures.
Saving-investment equili
ium models:
The Keynesian saving and investment equili
ium looks as the dynamic between the household and business sectors.
The household Sector consist of anyone in an economy that buys goods and services is included in the household sector. It refers to an economy's entire workforce. The household sector is in control of gross domestic product spending expenses. Similarly, the economic sector consists of the economy's individual, profit-seeking businesses that combine finite capital to provide wants-and-needs fulfilling goods and services. The private sector is in control of gross domestic product spending investments.
In a simplistic macroeconomics model with no government spending and no foreign market, we have: Y = C + S, where S represents personal savings, Y represents real GDP, and C represents real demand spending.
Real GDP is calculated as a flow of earnings that are either spent or saved. In a state of equili
ium, all profits are expended. We only have two forms of spending: C and I,
As a result, Y = C+I, or Real GDP, is expended on consumption and investment in equili
ium. As we substitute for how profits are distributed, we get C + S = C + I or I = S. In a closed economy model, equili
ium can be expressed as I = S,
However, suppose investment spending increases as a result of contraction in the economy, causes the IS curve to move to the left of I(r) to I’(r). Consumption has a multiplier impact on national income and product. The equili
ium interest rate will then decreases before savings and spending are equal again. [In the diagram, point F] If this occurs, all investment consumption and savings levels will decreases until they are equal again. At point F equili
ium there will low interest rate and output (Y).
Demographic trend and interest rate:
Over the course of a lifetime, individuals tend to save at different rates. Midigliani and Milton (REF) proposed a theory of lifecycle hypothesis which attempts to explain this. They propose that population ageing is a natural reason and it is a problem that has important implications for household savings. Savings differ over our lifetimes in an inverted U-shaped pattern, according to the life cycle hypothesis established by Nobel Laureates in Economics Franco Modigliani and Milton Friedman, among others: the theory assumes that the young and elderly save the least, while the middle-aged save the most. The need to preserve a reasonably consistent standard of life over time drives this trend. To do this, people must invest more at younger ages where their income is higher, and then use these opportunities to increase their quality of life at older ages...