Question

a4). How is interest rate determined? and Why do interest rates vary among countries ? (200 words),

NO HANDWRITTEN ANS please

Answer 1

An interest rate is a rate charged by a lender to a borrower. This is the extra amount which needs to be paid over and above the principal amount when you borrow the money. The interest rate in U.S. is determined by the ,Federal Open Market Committee (FOMC).

Federal Open Market Committe consists of seven governors of the Federal Reserve Board and five federal Reserve Bank presidents. This committee is responsible for meeting eight times a year to determine the changes in monetary policy and the interest rate.

The interest rates is different in different countries. This is due to the fact that the economic status of every countty is different. Some of the reasons for the interest rates to vary among countries are Demand and Supply, Inflation rate , government policies and so on.

When the demand for the currency is high in a country, then the interest rate of the country is high due to the low availablility of fund.

In case of inflation , when the rate of inflation is high, the interest rate is high in order to improve and sustain the value of the currency of the country and vice versa.

The government also plays an important role in case of affecting the interest rate. The government may increase or decrease the interest rate as per condition of the economy in order to boost the economy.

Thus, these are some of the reasons due to which interest rates vary in different countries. We can also see in reality that the developed countries usually have the least interest rate and underdeveloped countries have higher interest rate.