4.5.2 Interest Rates

• Lower interest rates encourage borrowing and spending, which stimulates economic growth.


  True
• When the Bank of England lowers the base interest rate from 5% to 3%, mortgages and loans become cheaper
• Interest rates are expressed as a percentage
• Order the economic impacts of interest rate changes:

  1️⃣ Lower rates encourage borrowing

  2️⃣ Increased consumer spending

  3️⃣ Stimulated economic growth
• Lower interest rates can lead to increased business investment and job creation.


  True
• The Bank Rate is a general policy tool used by the central bank to influence other interest rates.


  True
• The Repo Rate is a short-term lending rate used by the central bank to control inflation
• Match the interest rate change with its economic impact:

  Lower interest rates ↔️ Stimulates economic growth

  Higher interest rates ↔️ Slows economic growth; controls inflation
• Lower returns on saving accounts discourage savings
• Interest rates represent the cost of borrowing money or the return on saving money
• Match the interest rate change with its economic impact:

  Lower interest rates ↔️ Stimulates economic growth

  Higher interest rates ↔️ Slows economic growth; controls inflation
• Lower borrowing costs increase business investment, leading to job creation and economic growth.


  True
• Lower interest rates encourage borrowing and spending, while higher rates encourage saving.


  True
• When the Bank of England lowers the base interest rate from 5% to 3%, lower saving returns discourage savings
• Match the interest rate type with its definition:

  Bank Rate ↔️ Rate at which central bank lends to commercial banks

  Repo Rate ↔️ Short-term lending rate using government securities
• The Repo Rate uses government securities as collateral
• Lower interest rates encourage borrowing and spending, which can stimulate economic growth.


  True
• Lower interest rates make mortgages and loans cheaper for consumers.

  True
• Increased business investment due to lower borrowing costs leads to job creation and economic expansion.

  True
• Lower interest rates encourage borrowing and spending, which can stimulate economic growth.


  True
• What do interest rates represent in the economy?

  Cost of borrowing money
• Lower interest rates encourage borrowing and stimulate economic growth.

  True
• Match the interest rate with its economic impact:

  Lower interest rate ↔️ Stimulates economic growth

  Higher interest rate ↔️ Controls inflation
• How do lower interest rates impact business investment?

  Encourage new investments
• Higher interest rates discourage consumer spending.


  True
• What is a carry trade in international finance?

  Borrowing low-interest currencies
• Match the interest rate impact with its effect on trade:

  Higher interest rate ↔️ Exports become more expensive

  Lower interest rate ↔️ Exports become cheaper
• The Repo Rate uses government securities as collateral
• What is likely to happen if the Bank of England increases interest rates from 5% to 7%?

  Borrowing decreases
• If the Bank of England increases interest rates from 5% to 7%, consumers and businesses are likely to borrow less
• What happens to consumer spending when interest rates rise?

  Decreases consumer spending
• Steps in a carry trade to profit from interest rate differentials

  1️⃣ Borrow in low-interest currency

  2️⃣ Invest in high-interest currency

  3️⃣ Profit from interest rate differential
• What happens to exports when a country's currency appreciates due to higher interest rates?

  Exports become more expensive
• Monetary policy aims to control the money supply and credit conditions to stabilize the economy.


  True
• One key goal of monetary policy is maintaining economic growth
• What is inflation caused by in an economy?

  Sustained price increase
• What is the current base rate set by the Bank of England?

  5.25%
• Higher interest rates reduce borrowing and lower inflationary pressures.


  True
• The Bank Rate is set by the central bank
• The Repo Rate is a short-term lending rate used by the central bank to control inflation.

  True