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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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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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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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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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218 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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121 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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134 views

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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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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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 ...
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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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284 views

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 ...
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560 views

interest rate and money supply

When the interest rate increases, I learned that money supply decreases because people put their currency back in banks in forms of assets and tend to save more, spend less. However, money supply ...
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Price Level and Value of money

When the price level increases in the economy, we generally know that the value of money decreases. However, what is the definition of money here? Is it just currency? Or does it include assets, ...
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Money Neutrality and Real Interest Rate

I learned from the Fischer Effect that Real Interest Rate = Nominal Interest Rate - Inflation Rate . But in today's class the professor told us that due to money neutrality, an increase in money ...
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284 views

The sequence of Money Supply - Interest Rate

Until now I've learned that the Fed controls the interest rates and that affects the money supply. For instance, The Fed increases Interest Rate ----> makes firms/households reluctant to borrow and ...
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Is real income the same as present value of income?

For example, if I know in time period 2 I will get paid £x in real terms Where the real interest rate of borrowing and lending is r% between period 1 and 2 Is this the same as being paid £x/(1+r) in ...
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Calculating the real interest rate, why would my thesis supervisor want me to subtract inflation instead of dividing by inflation?

I'm writing my thesis and for the data I'm using I had calculated the real interest rate by dividing the nominal interest rate by the inflation rate. My supervisor recommended me to change it to ...
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How Are The Interest Rates Affected By Inflation Changes?

I have been reading about how an increase in interest rates causes inflation to decrease as there is less money in circulation. However; I have never seen an article explaining how interest rates are ...
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How can the bond market be overvalued when the value of a bond is a function of interest rates?

I seem to have a major misconception in my understanding of the bond market and how interest rates and demand and supply influence valuation levels. I hope someone will be able to clarify. My ...