Interest Rates

10 Commerce- Our Economy

Interest Rates
Interest rates reflect the price of money.
Changes in rates affect both savers,
borrowers and those who wish to
undertake financial investments in
Australia.

Regulating the economy

To regulate the level of economic activity the
government uses two approaches.
- Monetary Policy
- Fiscal Policy

Monetary Policy
The RBA uses interest rates as a mean
of regulating the Australian economy.
They do this by increasing or
decreasing the cash rate.

Fiscal Policy

Government spending and

taxation are used to exercise
control over the economy.
How??

Price of Money
A rise in interest rates means that money
is dearer and tends to slow the economy.
A drop in interest rates means that money
is cheaper and tends to speed up the
economy.

Reserve Bank of Australia

The governments bank but is
independent.
The RBA sets one interest rate (the cash
rate) which filters through to the banks.
How???

Two ways
Interest Rates act in two basic ways
o Investment (high rate is good)
o Borrowing (high rate is bad)

A rise
A rise in interest rates can slow the
economy by discouraging consumers from
spending and businesses from expanding

Inflation
During severe inflation, rates are raised to
halt economic activity and dampen down
price levels. Rising rates increase the cost
(and therefore reduce) the amount of
borrowing.

Types of interest rates

fixed - remain the same throughout the
course of the loan
variable- increase or decrease according
to economic conditions
short term or long term