What effect will it have on a country's BoP?
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Higher Interest Rates? watch
- Thread Starter
- 13-05-2015 21:21
- 13-05-2015 21:54
I doubt you will be asked this question. It really depends on the most powerful force.
Interest rates aim to control inflation and investment.
Raised interest rates means:
* Investment decreases as credit is less available and repayments are dearer. This decreases AD & means higher unemployment and therefore less affordable imports = imports decrease
* Consumers are less likely to take out a loan as saving becomes an incentive. Lower consumer spending means less spending on imports and may therefore decrease current account deficit.
* Exports become more competitive as a result of lower inflation and they subsequently lower the deficit on the current account.
* Higher interest rates relative to other nations will cause an appreciation of the Pound Sterling as it is more attractive to deposit cash in the UK. This will decrease exports as they become dearer.
4 means worse deficit, rest mean better deficit (moving closer to a surplus)
More of a value judgement than a testable situation.Last edited by SotonianOne; 13-05-2015 at 22:00.