Question

Many people believe that high interest rates are bad for the economy. It is not widely known that some benefit from higher interest rates. Who benefits when rates go up? Why can higher interest rates indicate the something positive is happening in the economy? Please use examples to support your posting.

Answer 1

CHANGES IN THE INTEREST RATES AFFECT THE ECONOMY IN A NEGATIVE AS WELL AS A POSITIVE WAY.HIGH INTEREST RATE IS NOT NECESSARILY BAD FOR THE ECONOMY.

HIGHER INTEREST INCREASE THE COST OF BORROWING BUT IT IS BENEFICIAL FOR PEOPLE DEPENDING ON BOND PORTFOLIOS, RETIREMENT FUNDS,INSURANCE COMPANIES,EDUCATIONAL ENDOWMENTS FOR THEIR INCOME.AS HIGHER INTEREST RATES GENERATES MORE INCOME FOR THEM.

FOR AN ECONOMY LIKE THE UNITED STATES,HIGHER INTEREST RATES ATTRACTS INVESTMENT FROM OTHER COUNTRIES.AS THE RESULT THE FOREIGN BUYERS INTERESTED IN BUYING BONDS IN THE UNITED STATES HAVE TO BUY DOLLARS FIRST IN ORDER TO COMPLETE THE PURCHASE.IT THUS INCREASES THE DEMAND OF THE DOLLAR AND RAISES IT VALUE WITH RESPECT TO OTHER CURRENCIES OF THE WORLD.

A STRONG CURRENCY HELPS TO REDUCE THE COST OF IMPORTS,AS A RESULT, IT LOWERS THE PRICE OF CONSUMER GOODS,OIL,FUEL..

WHEN THERE IS AN INCREASE IN INTEREST RATES,INTEREST PAYING SECURITIES LIKE TREASURY BILLS ATTRACT MORE INVESTORS,SO THE DEMAND FOR STORABLE COMMODITIES FOR EXAMPLE GOLD IS LOWERED,AS INVESTORS SHIFT THEIR FUNDS TO OTHER INVESTMENTS AND SO IT LOWERS THE PRICE OF COMMODITIES LIKE GOLD.

SO THE INCREASE IN INTEREST RATES BENEFITS SAVERS AS THE GET INCREASED RETURNS FOR THIER SAVINGS,THE BANKING AND FINANCE SECTOR BENEFIT AS WELL,EXPORTS WILL BE LESS COMPETITIVE  AND IMPORTS WOULD BE CHEAPER,THE VALUE OF CURRENCY INCREASES,

HIGHER INTEREST INDICATES THAT THERE IS A POSITIVE INFLATION SCENARIO WHERE THERE IS A LOWER PRICE OF IMPORTED CONSUMER GOODS AND HIGHER PURCHASING POWER OF THE DOLLAR.

BETWEEN THE YEAR 1981 AND 1982 THE US ECONOMY WAS FACING INFLATION AT 14% IN A YEAR,THE FED INCREASED INTEREST RATE TO 20% WHICH INITIALLY CAUSED RECESSION BUT IT BROUGHT TO CONTROL THE HIGH INFLATION EXISTING IN THE ECONOMY.

THUS HIGH INTEREST RATES HAS THE ABOVE STATED POSITIVE EFFECTS ON THE ECONOMY ANS IT IS NOT NECESSARILY BAD FOR THE ECONOMY,AT CERTAIN SITUATIONS IT IS THE MOST IMPORTANT TOOL USED BY THE FED TO BALANCE THE ECONOMY.