How Are Interest Rates And Unemployment Related In Macroeconomics?
Thursday, February 11, 2010 22:32Posted in category Unemployment Questions
I understand interest rates are set by central banks who monitor inflation, unemployment, and other stuff but I don’t see how lowering interest rates could reduce unemployment.
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maz says:
February 12th, 2010 at 5:31 am
when the interest rate is high:
- people prefer to keep the money in the bank, instead of spending on goods such as car.
when people don’t buy car, GM faces lower customers, so their profit shrinks and they have to fire workers. (negative effects on employment).
- from another perspective, when interest rate is high, companies won’t borrow money,bcoz its expensive for them, So they may postpone their expansion and entrepreneurial activities which could hire some employees.
Crookedl says:
February 12th, 2010 at 5:35 am
Interest rates are really the cost at which businesses and consumers finance their spending. When interest rates are high, borrowing becomes more costly, and so businesses and consumers have greater incentives to forgo current consumption to instead save and yield the high rate. Conversely, when interest rates are low saving becomes less profitable while borrowing becomes less expensive. In this way low rates create incentives for businesses and consumers to finance spending through borrowing.
Mikey Me says:
February 12th, 2010 at 7:18 am
Since organisations run on borrowed funds ecspesially on medium to long term investments e.g. purchase of raw materials, expanding a fleet of cars, expanding factories. High interest rates detter organations to engage in such decisions hence increasing unemployment.