Posted tagged ‘Interest rate’

The Role of Interest Rates in a Market Economy.

October 3, 2012
saving and spending

saving and spending (Photo credit: 401(K) 2012)

Do interest rates determine the amount of savings or does the amount of savings determine the interest rate?

We place a higher value on possession of a good or service in the present then possession of the same good or service at some point in the future. Unlike a good or service, paper money has no use value, other than use for starting a fire if you are cold or toilet paper if you run out. It’s only value is in exchange. Money is certificates of purchase, and can be exchanged for any good or service at any time, therefore we value money in the present more then we value money in the future. Money represents the ability to acquire a good or service you desire, it is not the good or service.

The premium we place on present goods compared to future goods, or put differently, the discount we place on future goods compared to present goods is (more…)