The question of how do interest rates affect economic growth has been at the fore front of many policy makers and central banks in recent times. In fact over the last few years there has been a major change in how the central banks of various countries handle this very important economic issue. The past was that rates were controlled by the governments of the various countries. In recent times this has changed with the central banks of various countries vying for control of the money supply in the economy. The result is that it is impossible to know how do interest rates affect economic growth without understanding how the central banks control the money supply.
How do interest rates affect economic growth? The answer to this question is twofold. First, it is impossible to accurately predict how do interest rates affect economic growth without first knowing how do interest rates affect economic spending. Without the ability to properly gauge how do interest rates affect economic growth the real question is how do interest rates affect inflation. Without understanding how do interest rates affect inflation it is impossible to make any accurate estimate of how do interest rates affect economic growth.
The concept of inflation is so important to the understanding of how do interest rates affect economic growth that it deserves its own write up. Inflation simply is the increase in prices over time. If inflation continues unabated an increasing number of goods and services become available at a higher cost to the consumer. As the cost of living increases so does the purchasing power of individuals. Thus, as the cost of living increases so does the demand for goods and services.
It would be impossible to accurately predict how do interest rates affect economic growth without understanding how do interest rates affect economic spending. The best that can be said is that any increase in inflation will inevitably have a significant impact on economic spending in the long term. The most effective way to deal with the issue of inflation is to follow the tried and true adage, “If it is good enough for the government, it is probably good enough for you.” If the economy is healthy enough, the government will usually allow an occasional inflationary spike if it results in an improvement in the economy.
The argument that follows here is that if economic spending is good enough then the consumer will demand more of the good and thus the prices of goods and services will rise. It is when the consumer perceives that there are not enough of the things they need or want that the economy becomes mired in inflation. When this occurs interest rates will naturally rise to keep the economy from being driven into a recession. With that said, most experts will say that it is wise for a person to save some money during economic growth just as it is wise to borrow money for a rainy day. The key to being able to understand how do interest rates affect economic growth is to have a basic understanding of inflation.
Inflation simply is the increase in cost of a particular item when it is actually bought by the buyer. The two major types of inflation are index driven and demand driven. With respect to index driven inflation is generally considered to be a good thing because it is a measure of how a currency's value has been going over time. For example, if you look at how the Japanese have been dealing with issues of deflation and how their economy has been growing while the United States and other developed countries have been struggling with the same problem then you can see how index-driven inflation is positive for the Japanese because the . . . . . . Japanese have managed to stabilize their economy while the Americans have suffered a prolonged recession.
On the other hand, when discussing how do interest rates affect economic growth it is important to discuss the opposite scenario. In a demand driven inflation is when the prices of goods and services go up but consumers continue to buy them because they are unable to get any cheaper. The problem with this scenario is that consumers begin to save so that they can have enough money to be able to afford to pay for the rising prices of goods and services. The opposite of this scenario is called deflation, where the prices of goods and services decrease.
When looking at how do interest rates affect economic growth, it is important to remember that the relationship between interest rates and economic growth is not a perfect one. It can vary depending on the state of the overall economy. However, if the economy is doing well and inflation is within the means of consumers then the impact of interest rates may not be as significant. On the other hand, if the economy is doing badly and there is no sign of it getting better then the relationship between interest rates and economic growth is definitely negative.