How_Money_Works_-_The_Facts_Visually_Explained

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Investment

increases due to

cheap loans and

high confidence

Export

prices fall

Exports

increase

Import

prices rise

Imports

decrease

Household

consumption

increases with

more spending

and less saving

EXCHANGE RATES

INTEREST RATES

CREDIT

Economy

expected to

contract

Unemployment

falls

Inflation rises

Demand rises

overall in the

economy

GOVERNMENT FINANCE AND PUBLIC MONEY

Attempting control

When interest rates

are lowered

Lower interest rates make it cheaper

to take out loans, and hence to spend

more money. Saving becomes less

attractive as interest rates are low.

With more money in circulation,

demand for products and services

rise, stimulating businesses and

increasing employment. Value^

of currency

decreases

HOW THIS EFFECTS THE ECONOMY

Companies may

become more

profitable as loans

and investors are

easier to secure

0 TIME (YEARS) 1 2

$$$

$

Central bank

reduces the base

interest rate

NEGATIVE INTEREST RATE POLICY (NIRP)

In some countries, the central bank

has experimented with cutting base

interest rates to a negative figure, for

instance, –0.01 percent. If this rate

is passed on by commercial banks,

it means that depositors must pay a

percentage of their deposit to the

bank. A central bank might impose a

negative interest rate to encourage

spending and investment, and

discourage savers from hoarding

cash. Commercial banks, however,

usually tend to be reluctant to

pass negative interest charges on

to customers, particularly small

businesses, as small depositors may

be driven to withdraw their savings as

cash to avoid fees. Large depositors

will pay negative rates to gain security

and a stable currency account.

Commercial banks

reduce interest rates;

loans are cheaper, but

saving becomes less

rewarding

%

40.5%

Argentina’s rate

of inflation in

April 2016, the

world’s highest

%

US_122-123_Interest_rates_2.indd 123 13/10/2016 16:18