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
|
tutor2u Home Page | Online Store | Contact Us | About tutor2u | Copyright Info | Your Privacy | Terms of Use
Working with Our Partners Sapphire Education | Learning Curve | Vue Cinemas | Moneypenny | Nexcess | Really Simple Systems | Actinic | Bickster Boston House | 214 High Street | Boston Spa | West Yorkshire | LS23 6AD | Tel +44 0844 800 0085 | Fax +44 01937 529236 Company Registration Number: 04489574 | VAT Reg No 816865400 tutor2u is proud to sponsor TABS Cricket Club and Collingham JFC as part of its programme of investment in local junior sport |
