Low Interest Rates seen sticking arond

25 05 2011

The article can be found here.

Explanation for bond and interest rate inverse relationship has been found here.

Discussion Questions:

1. Do you think it is healthy for Bank of Canada/US to keep the interest rates this low? What could be some challenges that would appear after having  low interest rates for a long period of time?

2. What do low interest rates do to each of the letters in the equation C+I+G+XM?

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2 responses

26 05 2011
Linda Lei

1. If Bank of Canada/Us keeps a lower interest rate, the housing price could increase because the interest rate is too low that buying houses wouldnt’ have to pay a significant amount of interest, less bank deposits couldn’t generate much revenue, more spendings. Overall, the economic growth would occur if government can control the housing price.
2. Consumer spending will go up because lower interest rate, less attractive to put money into bank account, people may just spend them. More investments because low interest rate, less cost, more investors rush to housing market, government spending will decrease because there is lower cost associated with it and also decrease import but increase export.

26 05 2011
susanyinshan

1. I believe that it would be not healthy for Canadian and US Banks to keep interest rates this low over a long period of time, because it will eventually result in inflation and makes an individual’s wealth seem worthless. Some of the challenges that would appear after having low interest rates for a long period of time would be inflation, higher debt rate (from mortgage), and decrease in the value of asset.
2. For consumer spending in the GDP equation, the low interest rate will generate more spending as consumers are more confident to pay back a loan with a low interest rate. For business investment, the low interest rate will decrease business investment as the return for each investor would be low compare to a high interest rate. For government, the low interest rate will allow more borrowing and spending to be accomplished by the government to keep the economy going and stabilize the national bank. Low interest rate will result in less import and more export as the value of the Canadian dollar goes down with the low interest rate.

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