Topic Videos
Interest Rates - 2021 Revision Update
- Level:
- AS, A-Level, IB
- Board:
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 20 Mar 2021
In this revision video we evaluate the extent to which a period of very low monetary policy interest rates has benefitted the UK economy.
Advantages of a period of low interest rates
- Reduced incentive to save – increases the propensity to consume out of disposable income – leads to a higher level of AD – stimulates growth
- Reduced mortgage interest rates increases effective disposable income of home-owners and might make it more affordable for first-time buyers to buy
- Low interest rates reduce the cost of external finance for businesses needing to borrow to fund capital investment – this can then help to increase LRAS
- Low interest rates help keep a country’s exchange rate low which then improves the price competitiveness of exports which can contribute to a higher level of AD
- Low interest rates helps to lower the risk of price deflation especially after a severe negative economic shock such as the Global Financial Crisis and the 2020-21 covid-19 pandemic
- Government can borrow cheaply when financing their own investment spending
Risks from a lengthy period of low interest rates
- Savers suffer a loss of income if real interest rates become negative
- Cheap mortgages drive property prices higher which worsens affordability and makes renting more expensive
- Banks don’t necessary pass on lower interest rates to their borrowers especially if the credit risk is high
- Commercial banks find it harder to attract savings deposits and lower interest rates on loans might make them less profitable
- Lower interest rates can lead to excessive amounts of consumer debt which can be damaging when an economy hit recession
- The economy might become too dependent on easy money / low rates
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