Get premium membership and access questions with answers, video lessons as well as revision papers.
1. Political short-term gain
Lowering interest rates can give the economy a short-run boost. Under normal conditions, most economists think a cut in interest rates will only give a short term gain in economic activity that will soon be offset by inflation. The quick boost can influence elections. Most economists advocate independent central banks to limit the influence of politics on interest rates.
2. Deferred consumption
When money is loaned the lender delays spending the money on consumption goods. Since according to time preference theory people prefer goods now to goods later, in a free market there will be a positive interest rate.
3. Inflationary expectations:
Most economies normally exhibit inflation, meaning a given amount of money buys fewer goods in the future than it will now. The borrower needs to compensate the lender for this.
4. Alternative investments
The lender has a choice between using his money in different investments. If one chooses one, one forgoes the returns from all the others. Different investments effectively compete for funds.
5. Risks of investment
There is always a risk that the borrower will go bankrupt, abscond, die, or otherwise default on the loan. This means that a lender generally charges a risk premium to ensure that, across his investments, one is compensated for those that fail.
6. Liquidity preference
General public prefer to have their resources available in a form that can immediately be exchanged, rather than a form that takes time to realize.
7. Taxes
Because some of the gains from interest may be subject to taxes, the lender may insist on a higher rate to make up for this loss.
Zainabdawa answered the question on July 27, 2018 at 14:18
- Assess the main reasons as to why the government regulate business activities in your country(Solved)
Assess the main reasons as to why the government regulate business activities in your country.
Date posted: July 26, 2018. Answers (1)
- Explain six reasons why developing countries should invest largely in small scale industries rather than in large scale industries(Solved)
Explain six reasons why developing countries should invest largely in small scale industries rather than in large scale industries.
Date posted: July 26, 2018. Answers (1)
- Explain the measures that can be taken to curb the challenges developing countries face in their industrial sectors(Solved)
Explain the measures that can be taken to curb the challenges developing countries face in their industrial sectors.
Date posted: July 26, 2018. Answers (1)
- Examine the key obstacles faced by developing countries in their industrial sectors(Solved)
Examine the key obstacles faced by developing countries in their industrial sectors.
Date posted: July 26, 2018. Answers (1)
- Let us say there is a sudden increase in demand in Kenya for Italian products. Explain how this increase will have an impact on the...(Solved)
Let us say there is a sudden increase in demand in Kenya for Italian products. Explain how this increase will have an impact on the money supply in Kenya's economy
Date posted: July 21, 2018. Answers (1)
- Outline functions of tender committee.
(Solved)
Outline functions of tender committee.
Date posted: July 16, 2018. Answers (1)
- Outline the functions of a Procuring Unit or procurement department in public organization.(Solved)
Outline the functions of a Procuring Unit or procurement department in public organization.
Date posted: July 16, 2018. Answers (1)
- Outline the Roles of the Accounting Officer
(Solved)
Outline the Roles of the Accounting Officer
Date posted: July 16, 2018. Answers (1)
- Outline reasons for the Termination of the Director General(Solved)
Outline reasons for the Termination of the Director General
Date posted: July 16, 2018. Answers (1)
- To what organizations is the PPDA act applicable to?
(Solved)
To what organizations is the PPDA act applicable to?
Date posted: July 16, 2018. Answers (1)
- Discuss Values of Good Procurement Governance
(Solved)
Discuss Values of Good Procurement Governance
Date posted: July 16, 2018. Answers (1)
- Explain the positive impacts of a rapidly growing population(Solved)
Explain the positive impacts of a rapidly growing population.
Date posted: July 16, 2018. Answers (1)
- With the aid of an appropriate example, explain what economists mean by the
term public good.(Solved)
With the aid of an appropriate example, explain what economists mean by the
term public good.
Date posted: July 9, 2018. Answers (1)
- Evaluate some of the other policies that government could use to reduce the
over-consumption of alcohol.(Solved)
Evaluate some of the other policies that government could use to reduce the
over-consumption of alcohol.
Date posted: July 9, 2018. Answers (1)
- Analyse the likely impact on consumer and producer surplus of the introduction of a minimum price for a unit of alcohol.(Solved)
Analyse the likely impact on consumer and producer surplus of the introduction of a minimum price for a unit of alcohol.
Date posted: July 9, 2018. Answers (1)
- With the aid of appropriate examples, explain the main features of oligopoly.(Solved)
With the aid of appropriate examples, explain the main features of oligopoly.
Date posted: July 9, 2018. Answers (1)
- Critically examine the assumption that firms will always aim to maximise profits.(Solved)
Critically examine the assumption that firms will always aim to maximise profits.
Date posted: July 9, 2018. Answers (1)
- Critically examine the view that advertising should be restricted not least because it is wasteful and distorts markets(Solved)
Critically examine the view that advertising should be restricted not least because it is wasteful and distorts markets
Date posted: July 9, 2018. Answers (1)
- Critically examine the view that setting a target for the rate of inflation does more harm than good.(Solved)
Critically examine the view that setting a target for the rate of inflation does more harm than good.
Date posted: July 9, 2018. Answers (1)
- Explain the difference between a rise in the general price level and a rise in the rate of inflation. (Solved)
Explain the difference between a rise in the general price level and a rise in the rate of inflation.
Date posted: July 9, 2018. Answers (1)