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Introduction:
Interest rates can be defined as the cost of borrowed funds; it can also be defined as the opportunity cost of borrowed resources. Interest rates are used by policy makers to implement monetary policies that involve adjusting interest rate levels. When interest rates are adjusted they will affect the level of borrowed funds. Interest rates will therefore affect the consumption behaviour and at the same case affect the investment behaviour in the economy.
Interest rates will determine the amount of money supply in an economy, and because the higher the money supply then the higher the inflationary pressure interest rates are used as a way to fight inflation in an economy. This paper discusses the effects of a change in the level of interest rate of investment and on consumption.
Investment behaviour and interest rates:
Investment can be defined as accumulation over time by firms of real capital goods and these goods yield the future flow and acquisition of other goods, investment levels in an economy will be determined by the interest rates which are the opportunity costs of borrowed funds, this is because most investments involves the borrowing of funds and therefore an increase in interest rates will discourage investment while a decline in interest rates will encourage investment.
According to Keynes the investment level was a function of interest rates and this relationship portrayed by Keynes is described in the diagram below:
When interest are at IR1 which are higher than IR2 then the level of investment is I1 which is at a lower level then I2, however when the interest rates are lower and the level is at IR2 then the level of investment camisetas del barcelona increases to I2. This diagram shows the relationship between investment and interest and an increase in interest rates therefore will discourage investment while a decline in investment will increase investment efforts.
Neoclassical theory states that an increase in the interest rates will reduce investment; they state that an increase in interest rate will result into an increase in the cost of capital and as a result of this increase in cost then investment will be reduced. For this reason therefore according to classical economists the interest rates will affect the investment levels in the economy, when there is an increase in the interest rates then the lower will be the rate of investment while a reduction in the interest rates then there will be an increase in investment.
When investment increases it will result to demand push inflation which originates from the real sector, when investment increases then the aggregate demand will increase and this will result into inflation. However when the investment levels increase then we expect the level of employment futbol club barcelona tienda and income in the economy to increase, this will be beneficial to the economy where the rate of employment will increase and the output level of the economy will also increase in terms of GDP.
According to Keynes theory on the demand for money he highlighted that individuals will demand money for speculative purposes, precautionary purposes and liquidity preferences. Speculative demand for money occurs where the individuals will prefer to hold money as an asset when other assets do look attractive, The level of speculative demand for money will depend on the interest rates camisetas de futbol barcelona and the income levels, when interest rates are high then the speculative demand for money is lower and when the interest rates are lower then the individuals will hold more speculative money demand, for this reason therefore individuals will hold more money and will not invest when the interest rates are high but when the interest rates are low the individuals will hold less speculative money and they will invest in other assets.