gcse economics - money - interest rates

 

An interest rate is the price or cost of borrowing money.

For example you might borrow £1,000 from a bank. However, they will not give you the money for free you will have to repay the £1,000 plus interest. AND

The reward for lending money

If you put money into a bank you will gain interest as a ‘thank you’ for lending the money.

CHANGES IN INTEREST RATES

Banks and building societies regularly change their interest rates. A change will have a major impact upon consumers, savers, borrowers, homeowners and businesses.

INTEREST RATES GO UP

Group	Effect	Knock-on
Consumers	Costs more to take out a loan to buy a car or a kitchen	Less likely to buy expensive goods
Borrowers	Their loan repayments may increase	Less money to spend on other goods
Savers	They get a better return on their savings.	More likely to save than spend
Homeowners	Their mortgage repayments increase	Less money to spend on goods and services
Businesses	Loans for expansion cost more	Less likely to expand or buy new equipment

INTEREST RATES GO DOWN

Group	Effect	Knock-on
Consumers	Costs less to take out a loan to buy a car or a kitchen	More likely to buy expensive goods
Borrowers	Their loan repayments may decrease	More money to spend on other goods
Savers	They get a lower return on their savings.	More likely to spend than save
Homeowners	Their mortgage repayments decrease	More money to spend on goods and services
Businesses	Loans for expansion cost less	More likely to expand or buy new equipment

n.b also be aware that a rise in interest rates also tends to cause a stronger £ and vice versa

ACTION

a. What do banks do with the money you save in their accounts?
b. Why do they charge borrowers a high rate of interest?
c. Why do long term savings accounts pay high rates of interest?
d. Why would homeowners celebrate a fall in interest rates?
e. Why would savers celebrate a rise in interest rates?

 SMART THINKING

a. What should the Bank of England do to slow down the economy?

These GCSE Economics revision notes have been kindly provided by Peter Davies of Mill Hill School, Ripley Keep Up-todate with your GCSE Economics - Subscribe Free to Economics in the News by Email

 

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