Interest Rates Essay

1393 Words Apr 24th, 2015 6 Pages
Jeniffer Kim
Theory of Interest
Professor Chiacchiere
How Interest is Effecting the U.S. Markets Today In 5000 BC, the lending of “food” money was commonplace in Middle East civilizations. Early loans and interest were based on agricultural produce. Because the acquired seeds and livestock could be replenished and reproduce themselves, the people could easily repay loans with interest using these goods. Throughout history, the practice of having interest charged on loans developed over the years. Today, people pay interest using various foreign currencies. It has been legal and regulated by different states, but it also has been restricted in different countries because of religious reasons. In the past, some cultures have regarded
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For this reason, many banks practice lending activities in order to make profit. When interest rates are lower, it is more likely for people to borrow money in order to make big purchases such as cars or houses. Lower interest rates act as an incentive for consumers because it allows them to spend more on what they desire. This in turn creates a ripple effect of increased spending throughout the economy. Due to the low cost of borrowing, it encourages any type of consumer to make large purchases. However, lower interest rates also have their drawbacks. Because lower interest rates increase consumer consumption, this causes the general population to have less disposable income at hand. Therefore, banks will give fewer loans to businesses and the general population. With a limited amount of loans, businesses are not able to function properly as the owners are forced to cut back on spending for new equipment or reducing the number of employees. This ultimately slows productivity of businesses and negatively impacts the economy.
Interest rates are known to commonly fluctuate in America. As a general rule of thumb, banks use the federal funds rate that lists rising or falling interest rates. Banks use the rate in order to lend each other money. Because the federal funds rate fluctuates daily, it affects all other loan rates. Due to its variation, the changes can affect both

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