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Markets - Money marketsFurther workIn this section we look at a few other areas of economic theory that you may want to consider when studying money markets and the effects of interest rates. Redistribution effects of interest rate changes - the effect of a change in the interest rate will depend on the individual financial circumstances of people. If the interest rate rises, net borrowers will be worse off, but those who are net savers may benefit from the change. Short-term and long-term interest rates - changes in the official rate of interest set by the Bank of England will always move short-term interest rates in the same direction. However, the movement of long-term interest rates is far less certain. Long-term interest rates are influenced by a variety of other factors and so could go either way when short-term rates are changed. Inflation expectations and real interest rates - when trying to assess whether interest rates are high or low, it is important to look at real interest rates (interest rates with the level of inflation removed). However, it is also important to see what the level of inflation expectations is, to judge whether this is an appropriate real interest rate. |
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