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Know How the Interest Rates Get Affected and the Reasons for Fluctuations

by May 11, 2018Homework Answers

Interest Rate Homework Answers

The interest rate is the rate imposed on the amount lent which is payable at a specified period. The total sum of money lent or borrowed is known as the principal amount. Here, a lender gives the money to the borrower for his use. The amount borrowed is usually in the form of money. However, it can also include goods or assets such as building, vehicle, etc.
The rate of interest is charged on the borrower depending upon their high or low risks. For example, if the party is thought to be high risk, then the lender charges a high rate of interest. If the borrower is low risk, then the moneylender charges a low rate of interest. Hence, the interest rate depends on the amount, i.e. the principal, the time when the borrower has to repay, i.e. the time, the compounding frequency, and the interest rates charged.
The interest rate is a commonly used concept in economics and students have to learn how to use. Hence, if you also have to solve the interest rate assignment, you can go through this blog. This blog details out the basics of the chapter. Hence, you can find it helpful.
Some Factors Affecting the Rate of Interest
Different factors influence the interest rate. The factors can also be useful for your interest rate homework answers. Some of the most common factors are:

  • Government

The government plays a meaningful role in influencing the interest rates. It means that when the government purchases more securities, it will result in the decrease in interest rates. It is because the bank will receive more cash and the government can use it to lend the customers.
Similarly, when the government sells more securities, it will result in increasing the interest rates. It is because the banks will have fewer funds to lend to the customers. It will eventually increase the interest rates.

  • Supply and Demand of Credit

Here, the provision of credit increases with the increase in the amount that a borrower has to pay. Hence, if you lend the money to a bank, then the bank can give more money to the customers. It will then result in more credit for the customers. Therefore, the increase in the supply of credit will decrease the interest rate.
In the same way, if the supply of credit increases, then the interest rate increases. For example, if you don’t pay the bill of your credit card. Then, the sum, as well as the interest rates, will pile up or increase, which will decrease the credit of supply.
For the demand of credit, its increase will lead to the rise in interest rates and the decrease will reduce the interest rates.

  • Inflation

Inflation is the increase in the prices and fall in the cost value of the goods and services. It can also be a factor for affecting the interest rate. When the inflation rate is higher, then the rate of interest is also increasing. Here, the lenders ask high-interest rates for compensation as the value of the money may decrease in the future at the time of repaying.
Why does it change?
We already learned how the factors affect the interest rates. Now, we will have to determine the causes for the changes in the rate of interest. These will help you a lot while calculating the interest rate homework answers. Hence, let’s learn some of the causes.

  • Economic status

The situation of the economy can change the rate of interest. For example, if the financial condition is high, then the interest rate will be higher. If the status is low, then the interest rates will become lower.

  • Investment risks

Here, the lender charges a risk premium to the borrowers. If the borrowers fail to repay, then they have to compensate the lender. The other risks that the bank can face are that the borrower may die, flee or go bankrupt.

  • Bank

The banks may change the interest rate for the growth of the economy. It can lower the rate of interest to boost up the economic growth, or it can increase the rates for slowing down the economy.

  • Delaying of utilization

Here, the lender does not utilize the money for the goods after a loan. It will help him get a positive interest rate in the free market.

  • Liquidity

The people prefer fluency in the resources they use. It means that they can exchange it immediately and it shouldn’t take more time for a change.
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