Economics Assignment: Analyzing Interest Rates and Economy

This assignment examines the impact of interest rates on economic growth, inflation, and various markets. The student analyzes the effects of increased interest rates on investment, the foreign exchange market, and the money market. The analysis includes how rising interest rates affect currency value and borrowing costs, and how they influence consumer behavior and savings. References to Keynesian economics and the impact of interest rates on the economy are also included. The assignment also discusses the role of interest rates in controlling inflation and the effects of risk premiums on the economy.

Running Head: ECONOMICS 1
Economics
Name:
Institution:

Economics 2
Question A
Increase in Real Economic Growth
This would be likely to be due to a ⇑ in capital return. A rise causes an⇑ in investment,
and the change raises interest rates. The growth would favor the fiscal outlook.
Increase in Inflation
Interest rates always tend to raise with increased expectations of inflation. Consumers are
faced with difficulty to make a choice now or postpone their purchases into the future (Keynes,
2016). If prices are to rise early, they tend to buy sooner, ⇑ in demand for borrowing and to
lower savings, and interest rates go up to balance demand and supply.
Increase in Risk Premium
The sudden would be unexpected. It would lead to default or debt restructuring, causing
investors to reduce holdings of sovereign debt in a given country. This would cause the rates to
go up without any increase in GDP.
Question B
Foreign exchange market allows participants to buy, sell or trade currencies. A ⇑ in the
interest rates of a country rises demand of the currency of that country and its value appreciates.
An⇑ in the rates makes investors want to capitalize high returns. The currency is viewed to be
stronger because investors seek more of the currency to make more profit.
The money market is a market that provides liquidity to market partaker through short-
term financing. Increase in interest rates does not directly affect the money market (Benes, Berg,

Economics 3
Portillo, & Vavra, 2015). However, it makes it more expensive to purchase them since it is more
costly to borrow money from banks. Public companies cut down their expansion plans, and the
money market prices take a hit.
Increased interest rates lower the level of borrowing or holding money and rather
encourages saving. People tend to borrow less from the lending institutions, thus spending less of
their money. It ⇓ the money in supply as the rates make borrowing more expensive. This
discourages high spending.

Economics 4
References
Benes, J., Berg, A., Portillo, R. A., & Vavra, D. (2015). Modeling sterilized interventions and
balance sheet effects of monetary policy in a New-Keynesian framework. Open
Economies Review, 26(1), 81-108.
Keynes, J. M. (2016). General theory of employment, interest and money. Atlantic Publishers &
Dist.