Fluctuating interest rates have a decidedly large impact on purchasing decisions. Higher interest rates mean that consumers don’t have as much disposable income and must cut back on spending. When higher interest rates are coupled with increased lending, banks makes fewer loans. Lower interest rates make it easier for farmers and manufacturers to borrow to invest in equipment and buildings. That gives business more incentive to invest when rates are low, increased investment in turn makes the economy grow faster. When interest rates rise, it will lessen the buying power of potential buyers because it increases monthly payments which are used to calculate how much money a lender will let the buyer borrow. This affects not only consumers but business as well. These changes can affect both inflation and recessions. Inflation refers to the rise in the price of goods and services over time. Every time the interest rate goes up ½ %, over 100,000 buyers are eliminated from the market place.
Interest rates and the effects it has on inflation and recession. Inflation is the rate at which the general level of prices for goods and services is rising. Recession is a business cycle contraction, a general slowdown in economic activity. To help keep inflation manageable, the fed watches inflation indicators such as the Consumer Price Index and the Producer Price Index. When the indicators begin to rise more than 2 to 3% a year, the fed will raise the federal funds to keep the raising prices under control. The demand for goods and services will then drop, in turn causes the inflation to fall.