Team C Reflection-Week 3
An interest rate is the profit or compensation made from the borrowing of a monetary asset (Colander, 2010). The interest rates are expressed as a ratio or percentage per dollar amount being lent. Although there are several types of interest rates, there are two main classes that each falls underneath: short-term and long-term interest rates. A short-term interest rate is the amount repaid on a debt that has a maturity date of less than one-year (NASDAQ, 2011). A long-term interest rate is amount paid for borrowing money over a longer period such as a mortgage or government issued bonds (Colander, 2010). There are a number of factors that cause the interest rates to fluctuate within an economy.
The strength of the economy itself plays a large factor in the fluctuation of the interest rate of any given economy. When a country’s economy is strong, the citizens have jobs, money is being spent, and saved in the market. As more money or demand for money increases so does the interest rate. The opposite is true when demand is low the interest rate will fall.
The inflation rate is also a factor in the rise and fall of interest rates in a country. Because interest rates on loans are generally a fixed rate the lender must account for inflation to prevent a loss on the repayment of the loan. Most lenders will charge a higher interest rate on a loan to offset the effects of inflation. Therefore, a steady rise in inflation will cause an increase in interest rates and deflation will lead to a decline.
The last major effect on interest rates is the United States federal government. The federal government is the largest borrower of assets in the United States (Financial Web, 2013). Stands to reason why the actions of the government has such a pronounced impact on the fluctuation in the interest rate in the market. The Federal Reserve Bank or central