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    Hi,
    i have to write an essay on the effect of interest rates on GDP. other than the obvious going interest rates going down means more consumer spending and more investment, however less savings potential, does anyone know of any other effects. thanks
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    You can talk about the effect of interest rates on exchange rates since exchange rates have an effect on exports/imports. And with the investment thing, you can talk about the multiplier effect and how increase in investment will raise the national income!

    I'm doing OCR AS Economics now so that' all I can think of
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    multiplier effect?
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    Look for it in your text book, maybe it's not on your syllabus, what are you doing?
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    Macroeconomics- IB year 1

    Also, i don't quite understand how interest rates affect exchange rates
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    I'm sure someone else will elaborate on this but when the interest rate rises more foreign institutions and investors choose to put their money into British banks because of the higher returns available on their savings. A bit like anything else, the more demand there is for British currency, the more it costs to "purchase". Hence, if interest rates rise, it almost, if not always results in a rise in the exchange rate.

    GDP (the value of a country's output) = consumption + gross investment + government spending + (exports − imports). This is a bit general, but basically a rise in the interest rate usually means that consumers cut back on their spending. This is because saving is more attractive, less goods are purchased on credit and most people have mortgages; a higher interest rate = more money to pay-back and less money to spend elsewhere. So, a rising interest rate slows down the level of spending within the economy and therefore businesses cut back on their production to avoid having excess capacity. If businesses produce less, the GDP falls because the value of our output declines. Interest rates are part of the government's monetary policy; their function is to slow down economic activity in order to meet the 2% inflation target.
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    accelerator effect: en.wikipedia.org/wiki/Accelerator_effect

    multiplier: http://en.wikipedia.org/wiki/Multiplier_%28economics%29

    you can always look them up on TSR wiki as well
 
 
 
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