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Essay / Research Paper Abstract
This 10-page paper attempts to answer the question as to why the functionality of the U.S. interest rate is not always perfect or effective. Topics discussed include functions of the interest rate (such as economic growth, control of credit and money supply and as a policy tool); definition of risk-free interest rate; saving supply and demand and a discussion about the money supply -- including how central banks influence interest rates. Bibliography lists 12 sources.
Page Count:
10 pages (~225 words per page)
File: D0_MTfiinte.rtf
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Unformatted sample text from the term paper:
stock market drops, people tend to panic, believing that this means the economy is taking a nose dive. This is not the case -- what this likely means is
that people are removing money from stocks and perhaps placing it elsewhere. At one time, the true economic story of the American
economy could be found in its interest rates. In theory, the function of interest rates were to control economic factors, to spur growth or to slow it when warranted.
We have found however, is that interest rates and their functionality are not always perfect. There are several reasons for this, one being outside factors, and one being
the human factor. FUNCTIONS OF INTEREST RATES Economic Growth The main function of interest rates is to either help spur or
slow down economic growth (TraderTalk Technical Tutorial, 2002). In theory, the economy is cyclical, with its ups and downs. However, when interest rates are controlled, this can help
the economy either grow or slow down. For example, during a recession, interest rates are low in order to help spur economic
growth (TraderTalk Technical Tutorial, 2002). Low interest rates tend to encourage businesses to borrow more money to finance increased production (TraderTalk Technical Tutorial, 2002). As business activity increases and more
people are hired to help that business activity increases, the demand for goods also increases (TraderTalk Technical Tutorial, 2002). The interest rate then in turn increases to try to put
a break on excessive borrowing and financing (TraderTalk Technical Tutorial, 2002). Too much economic growth can lead to inflation, during which time
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