You are here:

Economics/hello, i have question....

Advertisement


Question
I read about quantitive easing that Inflationary risks are mitigated if the system's economy outgrows the pace of the increase of the money supply from the easing. If production in an economy increases because of the increased money supply, the value of a unit of currency may also increase, even though there is more currency available, my question is : do interest rates also increase ? if so is that good for economy ? (if dollar increase in value and interest rates )

Answer
Thanks for the question!

Interest rates management is actually managed in a planned an intentional way by the federal reserve, which controls something called the federal funds rate, which is the rate at which other banks borrow from the federal reserve.  By changing this rate, it influences other interest rates because banks will try to maintain a specific margin of differential between their loans and their debts.  In other words, banks will give loans at a higher interest rate than they borrow money so that they make a profit, so the rate at which they borrow money will influence the rate at which they lend money.

To answer your question, interest rates will not necessarily increase.  It might be good economic policy to increase interest rates, but there is nothing saying that MUST rise.  That being said, during economic growth, it is frequently good economic policy to increase interest rates in order to control anticipated debt growth and inflationary rates during the coming boom-cycle.

I hope that answers your question.

Economics

All Answers


Answers by Expert:


Ask Experts

Volunteer


Michael Taillard

Expertise

Accepts most economic questions

Experience

Consulting with major corporations, government agencies, political organizations, small businesses, non-profits, start-ups, and even individual people. Teaching at universities around the world, and developing original coursework. Performing original research and analysis. Writing books and scientific studies.

Organizations
American Economics Association

Publications
http://www.barnesandnoble.com/s/michael%20taillard You can also check Proquest for a small selection of my research.

Education/Credentials
PhD (Financial Economics; honors) -- MBA (International Business Finance; honors) -- Grad School Certificate (International Business Management; honors) -- BS (International Business Economics; honors) -- AA (Business Administration; honors) -- Certificate (Chinese Language and Culture) -- Trade School (Transportation Logistics; honors)

©2017 About.com. All rights reserved.