What Is the Interest Rate and Its Control?

Surname 4

Interest rate can be explained as the rate by which money appreciates whenever it’s borrowed. In simpler terms, interest rate is the amount of money debtors pay to creditors after borrowing money for a specific period of time. According to Warnock & Veronica (41), it’s expressed as a percentage of the amount of money borrowed. Interest rate is an important factor in the money market since it usually used when dealing with different variables. When dealing with inflation, investment and unemployment, interest rates are taken into consideration. Central banks from different countries usually adjust interest rates when regulating the economy. They will lower the rates to increase both consumption and investment in the country. In developing nations, interest rate keeps on changing to absorb the changes in the economy. However, in developed states, the rates are kept at a certain level to sustain targeted inflation rate. For any economy to be sustained, rates of interest must be kept on check throughout. The paper will cover data collection, analysis and computing of interest rate.
Obtaining data
It’s the process through which information about a certain aspect is collected from the field. It usually involves various methods used to obtain the data from the target field and the target aspect. The data can be qualitative as well as quantitative depending on the issue being addressed. In our case, we are concerned with quantitative data on interest rates. Data on interest rates in United States as well as data on World Bank can be used to address our case. United States rates of interest will be our concern starting with the trend taken by the rates from the past. The graph below shows some statistics on the trend.
Graph 1: US rates since 1950 to 2012 (Hartman 98).

Graph 2: Effects of raised interest rates to the US economy (Hartman 95).

The graphs have been extracted from United States websites. They do show the actual data in the field which is used by the government or the central bank to come up with solutions whenever problems arise.
Analysis of the data
This stage involves converting the data collected from the field into terms which can be understood by everyone. It’s said to be a discussion on the data collected. Interpretation of the data tells the actual situation in the field. Analysis of field data helps identify problems in the field which to come up with a solution to them. The first set of data presented by graph 1, it shows how interest rates have been changed in the United States from the year 1947 to 2012. It is evident that the rates have been rising steadily as time goes. The highest mark of interest rates reached was in the duration between 1977 and 1982 reaching 20th mark. Raising interest is as a result of increased US federal Funds Rate targeted by the government. To increase or decrease the rates, central bank uses open market operations to manipulate them. It involves either selling or buying.
The second graph shows United States hiking cycle from 1955 to 2004. All tightening cycles carried out by the country and the effect they had to the economy. The duration between one cycle and the other depends on the way economy responds to the change. Raising interest rate targets increased investment leading to economic growth in the country. According to Deutsche, the average rate by which American economy hiked was 4.95pc. The level to which the central bank increases interest rate is determined by the previous change as well as the response from the economy. When marked by a slow recovery process, the rates are raised not a high level. The largest hike amount was marked in the period between 1976 and 1980 showing an increase of 20 from the first one.
Data computation
This is the use of mathematical formulas to work on the data from the field and turn it into exact figures. If it’s about a certain change in interest rates, the exact rate of change is calculated. Calculations carried out will bear the exact figure of the changed as well as its effects. In computing rates of interest, different mathematical formulas are have been used to come with the exact figures required. A simple interest rate calculator takes the form of I=Prt with “P” being the principal amount. “I” represents interest amount with “r” being the rate of interest in decimal and t being the time involved. One of the examples includes:
P=$10, 000
R= 3.875 per year
Time= 5 years.
Since I= Prt, then
I= 10,000*3.875/100*5
Simple interest accumulated for a principal amount of $10,000 in a period of 5 months at a rate of 3.875 is $1, 937.50. Anyone borrowing will pay additional $1,937.50.

Interest rates are basic for the forward movement of the economy. Manipulation of interest rates will have either positive or negative effects to the economy (Warnock & Veronica 128). Data collected about the rates of interest in United States show that there is no any given trend in the change of interest rates. The data show that rates have been going up and down from time to time. The effects they have to the economy determine the next change to follow. Analysis of the data gives the required information to inflict a change to the economy. Calculations will give the exact figures required to establish a certain conclusion.

Work cited
Hartman, David G. “The international financial market and US interest rates.” Journal of International Money and Finance 3.1 (1984): 91-103.
Warnock, Francis E., and Veronica Cacdac Warnock. “International capital flows and US interest rates.” Journal of International Money and Finance 28.6 (2009): 903-919.

Did it help you?

Cite this Page

What Is the Interest Rate and Its Control?. (2022, Feb 13). Retrieved from https://essaylab.com/essays/what-is-the-interest-rate-and-its-control

Need customer essay sample written special for your assignment?

Choose skilled expert on your subject and get original paper with free plagiarism report

Order custom paper

Without paying upfront