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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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If global financial conditions tighten everywhere, would currencies still depreciate?

If global financial conditions tighten everywhere, leading to increases in domestic real interest rates, would currencies still depreciate? Because interest rate increases cause depreciation by ...
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Expected exchange rate and interest rate

If say the markets expect the home country's currency to appreciate, how will that affect equilibrium output and interest rate? What I think: If they expect home country's currency to appreciate, ...
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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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Interest rate problem

I am supposed to solve this problem: mexican interest rate is 28%, interest rate in the US is 7% and exchange rate is 7.5 Mexican pesos for 1 US dollar. If interest rate parity applies and we don't ...
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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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What is this guy on about? Real rate deviation from steady state counterpart [closed]

I'm reading some notes and it says Which makes absolutely zero sense. $\hat{r_t}$ is not a deviation of the interest rate $r_t$ from its "steady state counterpart", because $r_t^n$ is ... not a ...
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Why isn't the relationship between income and wealth just real interest rates?

From my understanding, real interest rates tell us how cheap the future is. So shouldn't they tell us what a country's net wealth should be based on the current GDP of a country? Since income can be ...
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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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Macroeconomic control variable in GARCH

I would like to model the effects of news coverage on stock returns using a GARCH model. News is given a sentiment score, which is included in the regression as a (daily) variable. However, I would ...
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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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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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payment being applied to interest and principle is not consistent with HELOC consumer loan algorithm

I've been getting really suspicious that my bank has their program logic incorrect for a HELOC (Home Equity Line of Credit) consumer loan I opened up in November 2016. It's a 15 year, 3.7% interest, ...
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Consumption Tax Effect

A country imposed a value-added tax of 7% on the consumption of the majority of its goods and services. Said government has a large and relentless govt budget ...
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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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Euler equations and reality

I was reading this blog post by Noah Smith where he argues that the interest rate implied by the Euler equation fails to match the data. His post is mainly based on this paper by (Canzoneri et al, ...
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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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real rates and domestic demand

recently i read somewhere that an emerging economy was vulnerable because it was running low real rates that failed to contain domestic demand pressures. can someone explain what is meant by this? i ...
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How can you show crowding out doesn't occur in a liquidity trap on a graph?

'In a liquidity trap, the excess rise in savings means that government borrowing won’t crowd out the private sector because the private sector resources are not being invested, but just saved. ...
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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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How does increase in repo rate arrest inflation? How does price of goods come down?

When the repo rate is increased, how does it reduce demand? What happens to supply on reduction in demand? Why can't the people spend the money, even when(suppose) they have no transaction with banks?
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Zero ECB rates and the danger of zombie companies

There is this argument that the zero ECB rate promotes more and more zombie companies in europe. If the ECB would increase the interest rates, these zombie companies would collapse (probably all at ...
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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 ...
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Can the Fed control the shape of the entire yield curve?

Is it often taught that the Fed can only affect the short end of the (Treasury) yield curve, while the long end is governed by investors' inflation expectations. Could the Fed in principle control the ...
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Is the time value of money natural or artificial?

Certainly there is a time value of money: If the nominal interest rate of treasury bonds is 5%, then if one has a choice between receiving a hundred dollar bill now and receiving it a year from now, ...
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Why is the inverted yield curve a good predictor of impending economic recession?

The inverted yield curve has often been cited as a good predictor of impending economic recession. What are the reasons to explain why is it a good predictor? Is the inverted yield curve a cause or ...
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How can I change this formula to better calculate the reward of some financial movements? (avoiding to consider maturation)

I am here to ask you a suggestion about how to correctly handle this situation related to how to calculate the earned money into an financial investment. Here you can find a basic Excel sheet related ...
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Fisher Effect - inflation and stock return

This is my understanding: Fisher effect posits that expected nominal returns on any asset would move one-for-one with expected inflation. That is, when expected inflation increase, the nominal return ...