Interest Rates and Monetary Policy
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Effects of an i. rates rise:

-         Increased cost of borrowing.  This reduces demand for consumer durables purchased on credit.

-         Higher opportunity cost of spending.  This leads to an increase in saving as indivs postpone current consumption in favour of spending in future time periods.

-         Increased mortgage repayments – reducing effective disposable income.

-         (But increase unearned income from bank accounts)

-         Higher i. rates have –ve impact on share prices, and real & nominal house prices: negative wealth effect. 

-         So negative wealth effect & reduces current effective disposable income – spend less.

Other Notes in this Category

1. Access to credit / Financial Deregulation
2. Consumption
3. Consumption and Saving Exam Questions
4. Determinants of Consumption
5. Inflation
6. Interest Rates and Monetary Policy
7. Key Points
8. Other Theories of the Consumption Function
9. Problems with Consumption Functon
10. Unemployment/Consumer Confidence/Uncertainty
11. Wealth Effect – Asset Prices, Debt Burden, and Windfall Gains

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