"Interest rates,kept at record lows during the financial crisis to spur lending, may also rise."  How could this spur lending?when interest rates rise people start borrowing money-they do  not...

"Interest rates,kept at record lows during the financial crisis to spur lending, may also rise."  How could this spur lending?

when interest rates rise people start borrowing money-they do  not start lending. so why in this nytimes excerpt does it say lending increased?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

First, interest rates have been kept low to spur lending.  When they rise, that will not spur lending.  What this is saying is that the interest rates had been low but they might have to rise and that would be bad.

Second, when interest rates rise, people do lend rather than borrow, if they can.  If there are high interest rates, you would not want to borrow because it costs more to pay it back.  But if there are high interest rates, you would want to lend because you get more return on your money.

So, this article is warning that interest rates might go up.  When they do, people will be less likely to borrow and aggregate demand might drop.

krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted on

First and foremost thing to understand in this matter is that the amount of net lending and net borrowing in an economy is always same. It is not as if amount of one of these has to increase as the amount of other decreases. Both these variables (lending and borrowings) increase and decrease simultaneously and by same amount.

Next thing to understand is that interest rates are affected by many variables other than the demand and supply of funds for borrowing.In particular the interest rates are affected substantially by the fiscal and monetary policies of the government.

Also the lowering of interest rates has two fold increase on the lending institutions such as banks. While they earn lower interest on the money they lend, they also incur lower cost by way of interest they pay to their depositors.

Finally, when the market interest rates are low as a result whatever factors, the industry and business is encouraged to borrow more, which in turn enables the lending institutions to lend more. This increase in lending and borrowing, which always move in tandem, contributes to increase economic activity.

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