Apr 18, 2016
- Complete the sentences below. Use the key words if necessary.
- Interest rates and monetary policy
key words
An is the cost of borrowing money: the percentage of the amount of a loan paid by the borrower to the lender for the use of the lender’s money. A country’s minimum interest rate (the lowest rate that any lender can charge) is usually set by the central bank, as part of monetary policy, designed to keep inflation low. This can be achieved if demand (for goods and services, and the money with which to buy them) is nearly the same as supply.
Demand is how much people consume and businesses in factories, machinery, creating new jobs, etc. Supply is the creation of goods and services, using — paid work — and capital. When interest rates fall, people borrow more, and spend rather than , and companies invest more. Consequently, the level of demand rises. When interest rates rise, so that borrowing becomes more expensive, individuals tend to save more and consume less. Companies also invest less, so demand is reduced.
If interest rates are set too low, the demand for goods and services grows faster than the market’s ability to supply them. This causes prices to rise so that inflation occurs. If interest rates are set too high, this lowers borrowing and spending. This brings down inflation, but also reduces — the amount of goods produced and services performed, and — the number of jobs in the country.
Different interest rates
key words - The is the rate that the central bank sets to lend short-term funds to commercial banks. When this rate changes, the commercial banks change their own , the rate they charge their most reliable customers like large corporations. This is the rate from which they calculate all their other deposit and lending rates for savers and borrowers.
Banks make their profits from the difference, known as a or , between the interest rates they charge borrowers and the rates they pay to depositors. The rate that borrowers pay depends on their , also known as or . This is the lender’s estimation of a borrower’s present and future : their ability to pay debts. The higher the borrower’s solvency, the lower the interest rate they pay. Borrowers can usually get a lower interest rate if the loan is guaranteed by securities or other collateral. For example, for which a house or apartment is collateral are usually cheaper than ordinary bank loans or — arrangements to borrow by spending more than is in your bank account. Long-term loans such as mortgage often have or that change according to the supply and demand for money.
or (HP) agreements have higher interest rates than bank loans and overdrafts. These are when a consumer makes a series of monthly payments to buy durable goods (e.g. a car, furniture). Until the goods are paid for, the buyer is only hiring or renting them, and they belong to the lender. The interest rate is high as there is little security for the lender: the goods could easily become damaged.
- Interest rates and monetary policy
- British English or American English?
- labour
- American English
- British English
- labor
- British English
- American English
- base rate
- British English
- American English
- prime rate
- American English
- British English
- labour
- Match the words in the box with the definition below.
- box
— the cost of borrowing money, expressed as a percentage of the loan - — having sufficient cash available when debts gave to be paid
- — paid work that provides goods and services
- — a borrowing rate that isn’t fixed
- — safe to lend money to
- — the difference between borrowing and lending rates
- — the quantity of goods and services produced in an economy
- — to spend money in order to produce income or profits
- box
- Name the interest rates and loans.
- . . . : a loan to buy property (a house, flat, etc.)
- base rate or prime rate
- overdraft
- hire purchase
- mortgage
- discount rate
- . . . : borrowing money to buy something like a car, spreading payment over 36 months
- hire purchase
- discount rate
- overdraft
- mortgage
- base rate or prime rate
- . . . : commercial banks’ lending rate for their most secure customers
- hire purchase
- mortgage
- overdraft
- discount rate
- base rate or prime rate
- . . . : occasionally borrowing money by spending more than you have in the bank
- hire purchase
- discount rate
- mortgage
- overdraft
- base rate or prime rate
- . . . : the rate at which central banks make secured loans to commercial banks
- discount rate
- mortgage
- base rate or prime rate
- overdraft
- hire purchase
- . . . : a loan to buy property (a house, flat, etc.)
- Are the following statements true or false?
- All interest rates are set by central banks. clue
- true
- false
- When interest rates fall, people tend to spend and borrow more. clue
- false
- true
- A borrower who is very solvent will pay a very high interest rate. clue
- false
- true
- Loans are usually cheaper if they are guaranteed by some form of security or collateral. clue
- false
- true
- If banks make loans to customers with a lower level of solvency, they can increase their margins. clue
- true
- false
- One of the causes of changes in interest rates is the supply and demand for money. clue
- true
- false
- All interest rates are set by central banks. clue
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