The Interest Rate and Six Key Indicators of Macroeconomics

The Interest Rate:

Although economists speak of the interest rate, there are in fact many different interest rates applying to loans of different periods and different degrees of danger. The different interest rates usually move up or down mutually so that economists speak of the interest rate, referring to the whole composite of different rates. But interest rates don’t move in concert constantly. The causes of variations in yield curve, that describes pattern of interest rates, are significant part of macroeconomics.

Whenever interest rates are near to the ground that is, when money is cheap investment be likely to be high, since businesses find that a wide range of possible investments would generate sufficient cash to pay the interest on borrowed amount, pay back the principal of loan, and still make a profit.

Interest rates on long term debt, like the 10 year notes issued by U.S. Treasury, are typically higher than interest rates on short term debt, such as the three-month Treasury Bills. Whenever long-term interest rates are shorter than short-term interest rates, the produced curve is said to be inverted. An inverted produced curve is one of the signals of possible coming recession.

Interest rates have varied widely in U.S. since 1960. Real interest rates that is, interest rates amended for inflation have even been negative sometimes. For the period of the 1970s nominal money interest rates were so low and inflation so elevated that interest and principal on a short term loan bought less commodities when the loan was repaid than the original principal could have purchased when loan was made. In early 1980s the Volcker years interest rates increased radically. Since then, they have remained higher than their levels of the 1950s & ‘60s.

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