How_Money_Works_-_The_Facts_Visually_Explained

(Greg DeLong) #1

122 123


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

40.5%


Argentina’s rate


of inflation in


April 2016, the


world’s highest


When interest rates
are lowered
Lower interest rates make it cheaper
to take out loans, and hence to spend
more money, while 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

£££

£

The 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 per cent. If this rate
were passed on by commercial banks,
it would mean that depositors must
pay a percentage of their deposit to
the bank. But while a central bank
might impose a negative interest
rate to encourage spending and

investment, and discourage savers
from hoarding cash, commercial
banks usually tend to be reluctant
to pass negative interest charges
on to customers, and particularly
small businesses, as depositors may
be driven to withdraw their savings in
cash to avoid fees. Large depositors,
however, may pay negative rates for
security and a stable currency account.

Commercial banks
reduce interest rates;
loans are cheaper, but
saving becomes less
rewarding

%

%

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