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    I have no idea what's the effect of cutting the interest rates but that's what written in the marking scheme. Any explanation?
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    borrowers versus savers is one idea.
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    I would have thought it would make it worse. I may be getting it mixed up with QE though
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    Borrowers vs Savers is probably the way to go.

    Linked to that, you could talk about how richer people have a higher MPS (marginal propensity to save) whilst the less well off tend to have a higher MPC (marginal propensity to consume). So, lower interest rates mean saving is less rewarding whilst borrowing (thus consumption) is cheaper. i.e. the rich people "lose out" in a way, whilst the poorer people are relatively "better off".

    Something that is also linked to this are the interest repayments on mortgages. Lower interest rates should lower these repayments for those on variable rate mortgages. However, there is an argument to say that you have to be relatively well off to buy a house (thus take out a mortgage) whilst "poor" people tend to rent.

    Either way, the link isn't clear cut and (like a lot of things in Economics) relies on a fair-few assumptions.
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    (Original post by n_251)
    Borrowers vs Savers is probably the way to go.

    Linked to that, you could talk about how richer people have a higher MPS (marginal propensity to save) whilst the less well off tend to have a higher MPC (marginal propensity to consume). So, lower interest rates mean saving is less rewarding whilst borrowing (thus consumption) is cheaper. i.e. the rich people "lose out" in a way, whilst the poorer people are relatively "better off".

    Something that is also linked to this are the interest repayments on mortgages. Lower interest rates should lower these repayments for those on variable rate mortgages. However, there is an argument to say that you have to be relatively well off to buy a house (thus take out a mortgage) whilst "poor" people tend to rent.

    Either way, the link isn't clear cut and (like a lot of things in Economics) relies on a fair-few assumptions.
    I disagree. Rich people tend to have money in assets rather than just savings accounts. If interest rates fall then the price of assets rises. They are better off.

    Edit: But yea, definitely nothing is clear cut in economics.

    My favourite quote of 3 years of it,
    macro is useless
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    (Original post by danny111)
    I disagree. Rich people tend to have money in assets rather than just savings accounts. If interest rates fall then the price of assets rises. They are better off.

    Edit: But yea, definitely nothing is clear cut in economics.

    My favourite quote of 3 years of it,
    Fair enough - that's also true. It then comes down to how much money they have in assets relative to savings.
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    Lower interest rates mean that those with money receive less for it, and those without money can borrow it cheaper. So its good for the poor and bad for the rich. (Simplistic, but thats the basic idea).
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    You can illustrate this by thinking about two 'periods' (eg two years). Say you earn £20000 in both years, and the rate of interest is 5% (assume you can either borrow or save at this level).

    How much can you spend in each year? Well you could spend £20000 in both years.

    Or you could spend £15000 in year 1 and save the other £5000. As the rate of interest is 5%, then that £5000 becomes £5250 at the end of year 1. So that would mean you could spend £25250 in year 2. If you do this you're a net saver in year 1.

    Another option is you could spend £25000 in year 1 financed by borrowing £5000. That means that you will have to pay the bank £5250 back. So in year 2 you only have £14750 to spend. If you do this you're a net borrower in year 1.

    Overall in that example, the net saver spends £40250 over the 2 years and the net borrower spends £39750.

    Now what happens if there is a cut in interest rates, say rates fall to 1%.

    The net saver spends £15000 in Year 1 and saves £5000 at 1%. Now that is worth £5050 to him in Year 2, so he spends £25050 in Year 2.

    The net borrower spends £25000 in Year 1 and borrows £5000 at 1%. He has to repay £5050 in Year 2 to the bank, so he spends £14950 in Year 2.

    The net saver has now spent £40050 over the 2 years. The net borrower has spent £39950. Compare those figures to the figures each ends up spending under the situation where interest rates were 5%, the net saver is worse off when its 1% and the net borrower is better off when its 1%.
 
 
 
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