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Why does a high interest rate discourage people from holding their money in cash?
Wiki User
∙ 8y ago
They can earn interest on the cash if it is invested.
MeGustaCulo
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Why is money demand downward sloping?
Money demand is always downward sloping because when the cost of holding money increases (e.g. interest rates rise) the quantity of money consumers hold decreases. This means at lower interest rates, people want to hold more money and fewer bonds.
What do people pay to borrow money?
The loan is called the principal. People pay interest to borrow money, but payment is interest plus money toward the principal.
Why do banks give interest on deposit?
Banks make money by lending money to people and charging people for borrowing. The amount banks charge is called interest. Banks borrow money from other people and pay them interest on the amount borrowed. Banks charge more interest on the money they lend than they pay one the money they borrow. That is how they make money. When people deposit money with a bank, the bank is literally borrowing money from some people so they can lend it to other people. That is why banks pay interest.
How bank earns?
Banks earn money by holding money you put into the bank and using it to loan to others. They then collect interest from that to support themselves and to repay you back.
What is the difference between banking and financing?
A Banker who borrows money and lends money for the people is called as Banking.Whereas financing is the lending of money for the people with an interest for the use of people.
Why does high interest rate discourage people from holding their money in cash?
They can earn interest on the cash if it is invested.
How do changes in interest rates affect money supply?
When the interest rates are high, people would prefer to save than holding money. That means money supply in the economy is decreased. Whereas when the interest rates are low people prefer to hold money and spend, means increased money supply in the economy.
Opportunity cost of holding money?
The opportunity cost of holding money is the nominal interest rate.
How do changes in interest rates affect the money supply?
When the interest rates are high, people would prefer to save than holding money. That means money supply in the economy is decreased. Whereas when the interest rates are low people prefer to hold money and spend, means increased money supply in the economy.
How does interest rates affect people?
Interest rates affect the value of holding assets compared to the value of holding money (since putting your money in an investment or a bank account is the opportunity cost to holding it as money). When interest rates increase, it is more profitable to save money than before, so the savings rate (the rate at which people save money at) increases and consumption decreases. Additionally, the interest rate also affects the net present value of the capital stock, wages, and other inputs in production, so production changes with the interest rate. Therefore, the interest rates can affect consumption and production.
Who has the authority to lower or raise interest rates to discourage or encourage the borrowing and spending money?
Federal Reserve
Who has the authority to lower or raise interest rates to discourage or encourage the borrowing and spending of money?
Federal Reserve
What is the real return on holding money?
the real interest rate
Is interest paid on promissary note tax deductible?
We are holding a promissary note, on a sale of a rental. Will the people owing the money to us be able to claim the interest on their taxes?
Why is money demand downward sloping?
Money demand is always downward sloping because when the cost of holding money increases (e.g. interest rates rise) the quantity of money consumers hold decreases. This means at lower interest rates, people want to hold more money and fewer bonds.
What do people pay to borrow money?
The loan is called the principal. People pay interest to borrow money, but payment is interest plus money toward the principal.
Why does the real interest rate affect planned aggregate expenditure?
Because the interest rate affects opportunity cost of holding money/spending it. Higher interest increases the future value of current money, and this change the optimal allocation decision of it in the present. For example, the less valuable money is in the future, the more of it you would expect people to spend now.
