What would be the response of savers when interest rates are high?
- Anonymous8 years agoFavorite Answer
Based on the classical theory of loanable fund, saving is a supply of loans. People will save more if interest rate is higher, because it will gain more income from saving. But the Austrian school, confirmed that saving is a time preference. If it comes from a reduction of consumption, it will create the liquidity of the banks. The banks can give loans to malinvestment and create bubble which will burst eventually. In Keynesian model, it is explained by the demand for money.Higher interest rate, less demand for money. Saving is determined by marginal to save which is equal MPC-1.The effect of interest rate is determined by IS-LM. Higher interest rate will lead to a decline in real GDP,which means also a decline in saving.
- MikeLv 78 years ago
One problem with saving to get high interest rates: in the 1970s, you could get 8% interest on a savings account, but inflation was driving up the cost of living at a rate of 11%. So you were losing purchasing power every year. With 20-20 hindsight it's easy to see you should have bought something durable the value of which would have kept pace with the rate of inflation.
- 8 years ago
To save :)
Home owners would also be cautions as interest rates affect mortgage rates as well, so spending in the economy would decrease, but savings would increase.
If interest rates are low, then people would not save as this is the "opportunity cost" of saving money, that is the cost of saving is low interest rate which is a negative, so you would spend when rates are low, and save when rates are high :)Source(s): Undergraduate - Financial Economics BSc Penultimate Year.