UA FI 301 - Chapter 2 Part 2 Interest Rates (7 pages)

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Chapter 2 Part 2 Interest Rates



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Chapter 2 Part 2 Interest Rates

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factors that affect interest rates


Lecture number:
4
Pages:
7
Type:
Lecture Note
School:
University of Alabama
Course:
Fi 301 - Intro Financl Instit Mkt
Edition:
1

Unformatted text preview:

Finance 301 1st Edition Lecture 4 Outline of Last Lecture I Loanable Funds Theory II Demand for Loanable Funds III Supply of Loanable Funds IV Equilibrium Interest Rate Outline of Current Lecture V Factors that affect Interest Rates VI Forecasting Interest Rates Current Lecture I Factors that affect Interest Rates i Impact of economic growth on interest rates i Puts upward pressure on interest rates by shifting demand for loanable funds outward ii What is economic growth Increase in GDP increase in goods in services to make of deficits and units we want economic growth higher than 3 GDP iii If economic growth starts iv Example mortgage rate interest rate is 4 if gdp goes to 5 what is going to happen to that interest rate The interest rate is going to increase because so much money is borrowed banks actually run short on money so they are going to raise the interest rate to borrow money so they end up making more money off of the loan they make the customer compete for this money they start becoming picky and choosy on who they are going to loan to v When there is a recession people get scared and start saving money instead of spending it then people are making the banks compete for lowest interest rates vi vii you will eventually see inflation viii Economic expansion raise interest rates start worrying about the inflation ix Inflation the cause of devaluation of currency because when prices go up your currency buys less x Government looks at economic growth and raises interest rates to slow the economy down xi Salaries may not go up as fast as the price of goods but the government doesn t want this why Because they cant raise taxes if we cant afford to live and we cant buy as much or have our same standard of living xii When a recession hurts unemployment rises and people don t spend and this is why interest rates lower and it creates job creation xiii Impact of increased expansion by firms 1 2 When people want to borrow money interest rates go up 3 When banks run



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