Assignment Sample on U25292 Economics Coursework 1
The interest rate forms an important part of the economic system of any nation, as it plays a major role when it comes to the determination of the cost that is included in borrowing, the returns in the savings of an individual as well as in investments, amongst others. The following section outlines the meaning of the rate of interest and how it is determined in the economy.
2. Meaning of rate of interest
In simple terms, the rate of interest can be defined as the type of payment which is made by a borrower to a depositor. The borrower can also be any type of financial organization that deals in the deposit of money, who provides money to an individual or organization, and after a certain period, the money is returned which includes the principal sum as well as the rate at which the sum was initially provided (Begg et al. 2020).
The rate of interest helps determine the borrowing behavior of an individual in an economy. A higher rate of interest discourages a borrower from borrowing money, whereas a lower rate of interest leads to an increase in the borrowing behavior of the consumers (Cecchetti et al. 2021). Thus, it can be stated that a lower rate of interest helps in inducing investment in the economy while a higher rate of interest discourages investment.
3. Determination of rate of interest
The determination of the rate of interest is a very important component as it helps in identifying the exact amount that a borrower has to pay back along with the principal amount after a certain period. Several steps need to be maintained before the rate can be estimated. The initial requirement of finding out the rate of interest is to be aware of the formula to determine the same. The formula for the same is given as, “r=I/Pt,” where r is defined as the rate of interest, I is the amount of interest which is paid within a specific period, P is defined as the principal value which has been initially taken by the borrower and t is the period within which the money will need to be returned (Nam et al. 2017).
Once the values have been computed in the given formula, and the answer is found then it is required to convert the value derived into whole numbers. The reason is that the initial derived value is mostly in decimal points. Thus, this is how the rate of interest is determined. Another method that can also be used is by computing the values which have been provided in the formula “I=Prt,” where it is generally calculated on an estimate of 12 months (Bank of England, 2021). Thus, it can be stated that the determination of the rate of interest is an important step.
Therefore, it can be concluded that the rate of interest forms an integral part of the economy as it is used to determine the values which help in providing an insight regarding the future economic activity of an economy. It also plays a significant role in regulating the role of demand in the economy by determining the behavior of the consumers.
Bank of Engalnd., (2021), Home Page, Retrieved on 29th October 2021 from https://www.bankofengland.co.uk/
Begg D. Vernasca, G, Fischer, S. and Dornbusch, R. (2020) Economics (12th ed) McGraw- Hill
Cecchetti, S. and Schoenhholtz, K. (2021) Money, Banking and Financial Markets (6th ed). McGraw-Hill
Del Negro, M., Giannone, D., Giannoni, M. P., & Tambalotti, A. (2017). Safety, liquidity, and the natural rate of interest. Brookings Papers on Economic Activity, 2017(1), 235-316. Retrieved on 29th October 2021 from https://www.econstor.eu/bitstream/10419/189853/1/sr812.pdf
Nam, Y., & Nam, Y. C. (2017). Photoplethysmography signal analysis for optimal region-of-interest determination in video imaging on a built-in smartphone under different conditions. Sensors, 17(10), 2385. Retrieved on 29th October 2021 from https://www.mdpi.com/1424-8220/17/10/2385/pdf