Interest rates usually affect our lives in several ways. The short-term interest rates determine the total cost that financial institutions will charge us when we borrow money while the long-term interest rates are generally the government bonds (Neiman, 2011). The Federal Reserve has great control over the short-term interest rates while the long-term interest rates are controlled by the forces of demand and supply.
When the government tries to regulate inflation in the economy, it does this by increasing the interest rates which makes the cost of borrowing to be relatively high. This makes us unable to obtain loans from the financial institutions which could help us in individual’s developments. Higher interest rates make us lower our spending since it hurts our disposable income much. When we cut down part of our spending due to the higher interest rates, we end up missing a lot that we could have gained from higher spending (Neiman, 2011).
During the periods when the economy is slowing down, the Federal Reserve tends to lower the short-term interest rates making the cost of borrowing less expensive. Due to this, we are able to obtain loans at lower costs hence re-invest in the economy generating more outputs. Lower interest rates make us to increase our spending hence in the long run increasing our standards of living since we can easily obtain money from financial institutions and re-invest to generate more income (Nielsen, 2009).
The long-term interest rates usually increases relative to short-term interest rates since they are determined by the market forces (Nielsen, 2009). Usually the markets forces that is demand and supply are affected greatly by the short-term interest rates.
Nielsen, B. (2009, February 2). Understanding Interest Rates, Inflation And Bonds. Retrieved from https://www.investopedia.com/articles/bonds/09/bond-market-interest-rates.asp
Neiman, M. (2011, May 18). How Do Interest Rates Affect You? Retrieved from https://www.bankrate.com/finance/mortgages/how-do-interest-rates-affect-you.aspx