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How Do Interest Rates Influence The Circular Flow Of Income?
at Loans : Mortgage : Finance
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Falling interest rates are supposed to increase the flow via two means.
1) Decrease saving – thereby increasing spending – there is no incentive to save as savings will not earn interest and money value will be eroded by inflation.
2) Encourages borrowing (from where if no one is saning?) – does not matter if this for investment or consumption – the increased borrowing stimulates demand and thus the flow goes faster.