Interest Rates (Class Notes)

In the Classical Model, the forces of savings and investments are what determined the interest rates. Interest rates are cost to borrow and also a reward to save.

The interest rate curve is upward sloping. This means that there is a positive relationship between interest and savings. The more money you save, the more interest you get in return. This encourages savers to save more.

• As a result of the interest curve being upward sloping this means that as the rate of interest increases, the level of savings would also increase, i.e., there is a positive relationship between interest and savings.

• Interest Rates is essentially the opportunity cost of consumption (consumer spending).

• If interest rate is too high then it prevents persons from borrowing.

• If interest rate is too low then persons are going to borrow a lot.

• Interest Rates are the cost of borrowing money and the reward for saving money past a certain amount.

• Demand is downward sloping so that shows that the relationship with interest rates is inverse

• If inflation is high it encouarges people to borrow less and save more

• Moral suasion

• r = Interest rates

• Borrower: As interest rates increase persons tend to borrow less

• Saver: As interest rates increases persons tend to save more and spend less.