Questions tagged [interest-rate]

The proportion of an amount loaned which a lender charges as interest to the borrower, normally expressed as an annual percentage. The interest rate is typically determined by a combination of market forces and monetary policy.

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Negative interest rates and banks

What effects do negative interest rates from a central bank have on banks? What are the takeaways from negative rates in Europe and Japan?
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Relationship between Growth in Purchasing Power and Real Interest Rate equations

My textbook gives these two equations including the real interest rate and says that the second equation (b) can be arrived at from the first (a), but doesn't explain how. rr = Real Interest Rate, r =...
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Gross interest rate ($R$) v. Net interest rate ($R-1$)

I am reading a macro-finance article that deals with asset financing. While it defines the gross interest rate to be $R$, it defines the net interest rate to be $r\equiv R-1$. In equilibrium, the ...
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Why are mortgage rates in USA so high compared to Europe?

What are the main reasons of high mortgage rates in USA compared to central Europe? In central Europe mortgage rates are about 75%-100% lower than in USA. For data on mortgage rates see: https://www....
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Why do prices go up when the central bank increases money supply?

From my understanding, when the money supply curve shifts to the right, interest rates go down, it follows that the price level decreases and the prices should go down? Thanks in advance.
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Relation between Inflation and Bank deposit interest rate?

I have my own novice theory that bank pays you interest for your deposit so that the value of principal amount remains the same in the future (as due to inflation, the price of the commodity will rise ...
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Calculation of Inflation and purchasing power

kindly I'm stuck in this problem instead of many attempts through net present value and other discounted cash flow methods, some one could give me a detailed information and answers on this problem : (...
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Is charging of interest inherently rent seeking?

Is the real interest rate component of interest (excluding default risk premium, etc) inherently rent seeking? The real interest rate is typically considered to repay the opportunity cost of lending ...
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Uncovered Interest Rate Parity Assumptions (UIRP)

When learning about UIRP i have naturally come across the assumptions under which it may hold. However i am having trouble understanding the role of these assumptions and what the actual consequences ...
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Is a loan lent with a rate under the inflation rate free money?

Suppose we have an inflation in a country with an annual 2% and we get a loan for an annual 1% (real interest). Is the money we receive free? This is a common practice in some European countries, ...
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Does commercial paper usually carry a higher yield than corporate bonds? Why?

In Banking: A Very Short Introduction, Goddard and Wilson write: [Commercial paper] usually carries a higher yield than corporate bonds. But aren't corporate bonds longer term than commercial ...
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Extraction of Inflation Expectation from bond yields

In my introductory monetary economics course we have learned that inflation expectations can be calculated by comparing yields on index-linked and conventional bonds of equal maturity and assuming a ...
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Why is an inverted yield curve NOT a good predictor for recessions except in the US?

I am trying to better understand the mechanism (if there is one) behind an inverted yield curve predicting - or causing, as some would argue - a recession. In order to do that, I'm trying to ...
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Why are the Fed's goals often described as the “dual mandate” and not the “triple mandate”?

The Federal Reserve Act Section 2A states: The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit ...
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Tax Cuts Affect on Economy?

If we look at the equation for national Savings = S(priv) + S(pub) = [Y-C+Tran-T] + [T-G-Tran] = Y - C - G . We see that Tax falls out of the equation. Therefore, does that mean changes in taxation ...
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Predicting Shifts in Supply and Demand for Loanable Funds

I know the answer is A.  but I need an explanation on why. I thought government savings would decrease since they have less tax revenue, shifting savings left and interest rates up. I could see how ...
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Central bank rate hikes and credit demand

Can someone help me unpack the quoted statement below? Trying to understand how the supply of credit influences the fed raising rates. I guess, why do rates rise or fall in conjunction if the fed ...
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How does raising interest rates calm inflation?

My understanding is that by raising interest rates, domestic CPI indices are less likely to rise signicantly. However, raising interest rates also attracts capital inflows and can create asset bubbles....
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Why do higher real interest rates increase land value?

I'm using this equation to calculate market value of land based on the levied land value tax: y = market land value x = land value tax r = real interest rate a = real time-independent land value i = ...
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Monetary economics: What is the causality between nominal and real interest rates?

I am very much confused about the causality between real and nominal interest rates, in monetary policy. So we know the Fisher equation: $$i_t = r_t + E \pi_{t+1}$$ Now imagine that the central bank ...
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If interest rate increases and consumption in the present increases, is present consumption a normal good?

I recently wrote an economics quiz and one of the questions was: Suppose "r" is the interest rate that prevails between the present and the future. If "r" increases and a household chooses to ...
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Why does raising interest rates work?

Why does the federal raising interest rates actually have an effect on the economy? The typical answer is that it reduces money supply by incentivizing saving and increasing cost of loans. But couldn'...
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Would capitalism without banks work?

According to Merriam-Webster's dictionary, capitalism is "an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, ...
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Fixed-income investment in a low interest-rate environment

From an investment perspective, it seems to me that a low interest-rate environment can yield to some relatively "un-risky" profits. As the interest-rate can barely go lower, we now it should rise ...
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Understanding interest rates

When a central bank 'pays' interest rate X / year, what does it mean exactly? Is that pure money printing? Where does that money (interest rate) come from? does it increase the debt of the country? A ...
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Why are future expenses considered less costly than expenses in the present?

I understand that future income is less valuable than income in the present because of the concept of present value, where money available today can be invested to earn interest or can be spent to ...
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Why can an increase in inflation rate, increase interest rates?

A Random Walk Down Wall Street (2015 11 ed). pp. 224 Bottom - 225 Top.   Changes in the rate of inflation will similarly tend to have a systematic influence on the returns from common stocks. This ...
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Daily variable for inflation

I was wondering if there is a way to account for daily inflation data. I have daily short-term interest rates, and I would like to convert them to real short-term interest rates. Can I just average ...
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Are Investments positively or negatively correlated with interest rate

Having just begun self-studying economics, I apologise if this question is too simple. Do investments increase or decrease with increased interest rate? According to the small, closed economy model (...
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291 views

Long-,short-term interest rates and inflation

I just read about the "dynamics" of long-, short-term intreset rates and inflation. Does the logic go as follows? Centrals banks determine interest rates which in turn determine the short term rates. ...
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Effect of risk premium on the money demand (LM curve)

In short, I'm having problems understanding the LM curve, as the explanation given by the picture is for me, the 4th row is counter intuitive. When risk premium increases it causes the interest rates ...
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190 views

What do interest rates tell us about the state of an economy?

I seem to have a misconception about what interest rates mean. On one hand, they signal how high a government's demand for money is, because if a government is ever in any serious need of money, they ...
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How does changing the Bank of England base rate work?

If we assume the demand for money (D above) is fixed in this position (for the purposes of this question), and supply (S) is fixed in this position, then how can the BoE change market interest rates (...
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How to calculate the optimal wage and the optimal rent on capital in an economic model?

In Dhondt & Heylen (2009)*, they specify a certain production function. Under some standard model assumptions such as perfect competition and so on, they calculate the optimal wage as $$ w_t = \...
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Interest Rate and Foreign / Domestic Investment

I read that increased interest rate attracts foreign investment but discourages domestic investment. Why does interest rate have different effects on foreign and domestic investments?
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Forward rate discounts

I'm working with the following task: "You are convinced that the bond market is dominated by long-term investors. Hence, you have your own view on the liquidity premium/discount that forward rates ...
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Why are real interest rates so non-volatile compared to investment?

Intuitively I would guess that real interest rates are highly related to investment. But there is a very low interest rate volatility, compared to investment: log investment is about 20 times more ...
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Why do banks offer less interest on larger deposits?

This may be a UK only thing but... I have noticed that it is very common to see current accounts that offer some interest on the first couple of thousand pounds deposited with them and then less ...
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Will an increase in interest rate cause short run aggregate supply to shift?

Most business borrow for financing their purchases of raw material and capital etc. Shouldn't a interest rate rise cause cost of production to increase, therefore shifting SRAS to left? Thanks in ...
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Why did the Dollar weaken after interest rate increase?

Yesterday the Fed increased the interest rate of the Dollar yet it's value decreased against various currencies (Source). According to this article it should be the other way around : In economic ...
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Interest rate Effects on labour supply

I was analysing, free of specificities, the effects of an increase in the real interest rate on labour supply in a two period setting. The obvious effect on leisure is the intertemporal substitution ...
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I want formula for compund interest with regular and fixed replenishments

For example: Let's suppose that at the end of the first year I got \$8 000 of revenue (like I have a business or something). I put the money in a bank at the beginning of the second year, annual ...
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Confusion about the effect of an increased expected inflation on the price level

In Mankiw's Macroeconomics 7th edition, on page 99, there is the following equation, which states that "the price level depends not only on today’s money supply but also on the money supply expected ...
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How does national debt work?

I'm trying to understand national debt. I gather that the United States, and other nations with central banks, accrue debt basically by printing new money at their central bank. This, I hypothesize, ...
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Did I calculate maximum price of machine correctly?

Problem: A firm wants to buy a machine for its factory. It will work for two years. During the first year it will yield 240 thousand roubles and during the second year it will yield 200 thousands ...
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Isn't buying currency with high interest rates a double whammy?

I will give an example of what I mean and please tell me what I'm missing because this can't be correct. For the sake of simplicity I will only use USD and EUR. So let's say that the central bank in ...
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Flat Term Structure and Immunized Portfolio Strategy

The current term structure is flat at 2%. You have a liability of $500,000 per year for the next five years. You decide to form an immunized portfolio. a) Describe your exact strategy if you ...
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The Fed pays 1.50% interest on reserves; so why are interest rates so low?

Since 14th Dec 2017, the Federal Reserve Bank has paid 1.50% interest on excess reserves. So why do depositors' interest rates still remain so low? According to BankRate, across the US, the ...
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Connection between low demand for US Treasuries and expectation of inflation

The expectations for inflation and fear of accelerated rate hikes on the part of the Fed seem to be driving the stock market correction in the US this February, 2018, and as a result of the jobs ...
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Impact on interest rates of massive government spending

At the last State of the Union address, the President of the United States has reaffirmed his intentions to undertake a massive 1.5 trillion dollar infrastructure spending project over the coming ...