Question

Saving vs. spending

The text indicates 4 main influences on interest rates, including preferences for consumption vs. saving. Do you think these preferences are more influenced by advertisements for products that are consumable today, or by ads that advocate investing for tomorrow? The text suggests that income, standard of living, and wealth can affect the ability to save or not. Are there other factors the text doesn’t explicitly mention which you think influence people’s saving and spending habits?

The text mentions the four main influence on interest rates include: 1. production opportunities, 2.time preferences for consumption, 3. risk, and 4. inflation.

Answer 1

Apart from four factors which are mentioned there are other factors which would affect the interest rates are:

1. Central bank policy of a country: If a country wants to increase growth by increasing the money supply it would reduce the interest rate. However wit the increase in supply of money of inflation too increases which increases interest rate.
2. Budget deficit or surplus: For a deficit government would borrow money to fund the deficit which would increase the demand and interest rates too
3. Business activity: With the increase in business activity the demand for money would increase which would increase the interest rate
4. Exchange rates: An appreciated currency will have more demand and increase in interest rate