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Impact of Interest Rates on Economic Growth

The document discusses how central banks use interest rates to control economic growth through expansionary and contractionary monetary policies. It shows that higher interest rates generally lead to lower economic growth by increasing savings and decreasing investment, money circulation, and vice versa for lower rates. Tables and charts compare interest rates and GDP growth rates in countries from 2005-2012, finding that periods of low rates correspond with higher growth. The conclusion restates that interest rates impact savings, investment, money supply, and ultimately the overall economy.

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Sarfraz Khan
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81 views15 pages

Impact of Interest Rates on Economic Growth

The document discusses how central banks use interest rates to control economic growth through expansionary and contractionary monetary policies. It shows that higher interest rates generally lead to lower economic growth by increasing savings and decreasing investment, money circulation, and vice versa for lower rates. Tables and charts compare interest rates and GDP growth rates in countries from 2005-2012, finding that periods of low rates correspond with higher growth. The conclusion restates that interest rates impact savings, investment, money supply, and ultimately the overall economy.

Uploaded by

Sarfraz Khan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

BY : Sarfraz Khan Tareen

1225170

Interest rate is a tool of Central banks to


control economic growth. The policies based
on interest rate can be of two types:
Expansionary

Monetary Policy.

Contractionary

Monetary Policy.

Impact of interest rate on Economic Growth.


Central Bank

Effect

Savings

Investment

Circulation of Money

Economy

Increase in
interest rate

Increase in
savings

Decrease in
Investment

Decrease in
Circulation

Low Economic
Growth

Decrease in
interest rate

Decrease in
savings

Increase in
Investment

Increase in
Circulation

High Economic
Growth

Interest Rate

Year

Interest Rates

USA

EU Zone

China

Japan

India

Pakistan

2005

2.25

5.58

0.25

6.25

2006

5.25

3.25

6.12

0.25

9.5

2007

4.25

7.29

0.5

10

2008

0.25

2.5

5.31

0.1

15

2009

0.25

5.31

0.1

4.25

12.5

2010

0.25

5.56

6.25

14

2011

0.25

5.56

8.5

12

2012

0.25

0.75

10

Average
Rate

1.84

1.97

5.84

0.15

6.66

11.50

Year

GDP Growth Rates

USA

EU Zone

China

Japan

India

Pakistan

2005

3.1

11.3

1.3

9.3

7.7

2006

2.7

3.3

12.7

1.7

9.3

6.2

2007

1.9

3.2

14.2

2.2

9.8

5.7

2008

-0.4

0.3

9.6

-1

3.9

1.6

2009

-3.5

-4.4

9.2

-5.5

8.2

3.6

2010

2.1

10.4

4.4

9.6

4.1

2011

1.7

1.5

9.3

-0.7

6.9

2.4

2012

1.3

0.4

7.4

3.2

5.5

3.67

Average
Rate

1.23

1.05

10.51

0.70

7.81

4.37

USA
Interest Rate VS GDP Growth Rate
6
5.25
5
4

4.25

4
3.1

2.7
1.9

RATE

1.7
1.3

1
0.25

0.25

0.25

0.25

0.25

0
2005
-1

2006

2007

2008
-0.4

2009

-2

-3
-4

-3.5
YEAR

2010

2011

2012

Interest Rate
GDP Growth Rate
Trend Line

EU Zone
Interest Rate VS GDP Growth Rate
6

4
3.253.3
2.25
2

3.2
2.5
2.1

1.5

RATE

0.3

0.75
0.4
Interest Rate

0
2005

2006

2007

2008

2009

2010

2011

2012

GDP Growth Rate


Trend Line

-2

-4
-4.4
-6

YEAR

China
Interest Rate VS GDP Growth Rate
16
14.2
14
12.7
12

11.3
10.4
9.6

RATE

10

9.3

9.2

7.4

7.29

Interest Rate
GDP Growth Rate

6.12
6

5.58

5.31

5.31

5.56

5.56

0
2005

2006

2007

2008

2009
YEAR

2010

2011

2012

Trend Line

Japan
Interest Rate VS GDP Growth Rate
6

4.4
4
3.2
2.2
1.7

RATE

1.3
0.25

0.25

0.5
0.1

0.1

0
2005

2006

2007

2008

2009

-2

-4

-5.5
YEAR

2010

2011

2012

-0.7

-1

-6

Interest Rate
GDP Growth Rate
Trend Line

India
Interest Rate VS GDP Growth Rate
12

10

9.8
9.3

9.6

9.3

8.5

8.2

RATE

6.25

6.9
6.25

5.5

Interest Rate
GDP Growth Rate

3.9

Trend Line

4.25

0
2005

2006

2007

2008

2009
YEAR

2010

2011

2012

Pakistan
Interest Rate VS GDP Growth Rate
16
15
14

14
12.5

12

12

10
RATE

9
8

10

9.5

10

7.7

Interest Rate
6.2

GDP Growth Rate


Trend Line

5.7

3.6

4.1

3.67
2.4

1.6

0
2005

2006

2007

2008

2009
YEAR

2010

2011

2012

16
14
12
USA

10

EU Zone
China

Japan
6

India
Pakistan

4
2
0
2005

2006

2007

2008

2009

2010

2011

2012

20

15

10

USA
EU Zone
China

Japan
India

Pakistan

0
2005
-5

-10

2006

2007

2008

2009

2010

2011

2012

14.00
11.50

12.00

10.51
10.00
7.81

8.00
6.66
5.84

6.00

4.37
4.00
2.00

1.84

1.97

1.23

1.05
0.15

0.70

0.00
USA

EU Zone

China

Interest Rates

Japan
GDP Growth Rates

India

Pakistan

Impact of interest rate on Economic Growth.


Central Bank

Effect

Savings

Investment

Circulation of Money

Economy

Increase in
interest rate

Increase in
savings

Decrease in
Investment

Decrease in
Circulation

Low Economic
Growth

Decrease in
interest rate

Decrease in
savings

Increase in
Investment

Increase in
Circulation

High Economic
Growth

Increase In
Government
Borrowings

Used to pay
expanses

Unproductive
use of capital

Interest Rate

High Inflation &


Low Economic
Growth
Increase in
Debt

Increase in
Liability

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