FTA Vantage Point: Interest Rates  

How do higher interest rates impact the economy?

  • To discover the different ways interest rates impact the economy
  • To understand the different stages of the economic cycle
  • To discover how interest rate movements impact unemployment
CPD
Approx.30min

In this way, the link between the supply of money and its velocity may be broken. 

At times of high inflation, policymakers may take the view that it is appropriate to slow the velocity of money, and one of the ways this can be achieved is through higher rates acting as an incentive to save, not spend. 

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Higher interest rates also may slow the pace of economic growth, increasing job insecurity and causing workers to hoard the cash they have, rather than spend it, and so reduce the velocity of money.

Governments can also either increase or slow the velocity of money via its own spending and tax policies. 

Dall’Angelo says there has been a shift in governments' attitudes, with higher levels of spending in Europe and the UK, which may mean inflation remains higher in the years to come than it was in the years prior to the financial crisis, regardless of central bank action. 

She says “For once, I am not as positive on the US and more positive on the UK and Europe, because it looks as though Biden’s spending plans in the US won’t happen.”

David Thorpe is special projects editor of FTAdviser 

david.thorpe@ft.com

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. What does the Phillips Curve conclude?

  2. What are the four stages of an economic cycle?

  3. Why is the ECB's 2011 rate rse now considered a mistake?

  4. What are the two ways governments can impact the velocity of money?

  5. Which type of asset has zero velocity of money?

  6. Why do higher interest rates act as a dis-incentive to banks to lend?

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You have successfully answered all the questions correctly, well done!

You should now know…

  • To discover the different ways interest rates impact the economy
  • To understand the different stages of the economic cycle
  • To discover how interest rate movements impact unemployment

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