BUS305: Competitive Analysis and Business Cycles (Money and Interest Rates)

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BUS305 : Competitive Analysis and Business Cycles (Money and Interest Rates

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BUS305 : Competitive Analysis and Business Cycles (Money and Interest Rates

Basically , all economic agents - the households , the business firms the government and the foreign sectors , contributes in the determination of the existing interest rate that a country 's central bank will offer Generally , the expenditures of these agents will contribute to the aggregate expenditure within the economy and later on will affect the equilibrium income

and will soon affect the supply and demand of money which is the core data needed to determine the interest rate (www .uri .edu

As for the specific indicators needed to take into consideration when borrowing a large amount of money or planning to spend for something of high value , that has interest rate in its policy , it would be Gross Domestic Product , Consumer Price Index , Inflation Rate and the Unemployment Rate

Gross Domestic Product is the measure of the value of all the production made within an economy (Woodruff moneycentral .msn .com . Usually , the GDP is a rough estimate of the aggregate expenditure , which estimates the equilibrium income in an economy . Since it determines income , it can also predict the demand for money . The higher the income , households tend to spend more leading to a higher demand for money , which will increase the interest rate (www .uri .edu . The Consumer Price Index (CPI ) is the measure of the price level needed to purchase a particular bundle of goods and services , e .g . a bundle may consists of burger , soda and a haircut . One good thing about the CPI is that it is considered a good indicator of the inflation rate . That is , inflation rate is measured as the change in the price level needed to purchase a bundle of good , or simple the relative change in the CPI . So , what really is the significance of realizing the inflation rate of the economy if it only talks about the price level ? Well , banks , in their computation for the interest rate when you are planning to borrow from them , they considers the real interest rate , which is the difference between the interest rate and the inflation rate thus , what we want is a lower inflation rate . The unemployment rate , on the other hand , has also something to do with the inflation rate . A simple logic of their relationship , as stated by Woodruff , is that lower unemployment rate , which may seem a good situation , will lead to a higher inflation rate , which in contrary is a bad situation

Now that we had set some indicators to be studied before borrowing and spending , we must also set in mind that the existing market is not a in particular , set policies to moderate the fluctuations in the market money supply and demand . Monetary policies imposed by this institution greatly affect the interest rate , as well as the income and inflation rate

Since we had noted that the interest...