Question

Suppose the population of Area Y is relatively young and the population of Area O is relatively old but everything else about the two areas is the same.

a. Would interest rates likely be the same or different in the two areas? Explain.

b. Would a trend toward nationwide branching by banks and the development of nationwide diversified financial corporations affect your answer to part a? Explain.

Answer 1

a. The interest rates would like to be lower in Area O where relatively older population exist because the old peoples exists on their savings and the interest generated on that savings, the higher interest rates would not be any motivating factor to increase savings.

The Area Y would not show saving generation because young ones spend more than save, so the interest rates would be higher in this case to encourage young ones to save.

b. The nationwide branching and development of banks and financial institutions will raise the interest rates in Area O due to increase in competition among banks and financial institutions to increase their deposits.