Why Is Interest Rate Great Important?

INTEREST RATE

An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. With almost everyone, interest rate is not a strange term. If anyone who has ever borrowed money to cover education expense or buy an apartment on installment plan, better than anyone else they understand absolutely clear what interest rate is.

WHY IS INTEREST RATE GREAT IMPORTANT?

Purchasing power of money is reduced, money depreciates constant in a long time because of inflation. No country wants inflation in high level. Vietnam also is trying to control inflation rate at 8%. By change the discount rate, central bank hope that can control inflation. This is a popular way of almost countries.

EFFECT OF AN INCREASE

When central bank increase the federal funds rate, it makes loans of commercial banks from the central bank becomes more expensive. Besides, it also impacts on both individuals and businesses.

The first indirect effect of an increased federal funds rate is that banks increase the rate that they charge their customers to borrow money. Individual are affected through rising to credit cards and other short-term loans. This has the effect of decreasing the amount of money consumers can spend. After all, people still have to pay the bills, and when those bills become more expensive, households are left with less disposable income. This means that people will spend less discretionary money, which will affect businesses' revenues and profits.

Therefore, businesses are also indirectly affected by an increase in the federal funds rate as a result of the actions of individual consumers. But businesses are affected in a more direct way as well. They, too, borrow money from banks to run and expand their operations. When the banks make borrowing more expensive, companies might not borrow as