FIN 010 Lecture Notes - Lecture 18: Yasser Arafat, Output Gap, Real Interest Rate
Document Summary
Interest rates (nominal and real) are components of the required rate of return. They directly affect the valuations of assets. In the economy, real interest rates affect planned expenditure for both households and businesses. Encourages households to save more and consume less, this. Reduces consumption spending. increases their financing costs. Together, higher real interest rates reduce both. The reverse holds true for lower real interest rates. Since the rba can control (short term) real interest rates, and. Real interest rates affect consumption and investment spending, the. Rba can stabilise the economy through monetary policy. To fight the recessionary gap, the rba can. Reduce real interest rate to stimulate consumption and investment spending, which. An important cause of inflation is an expansionary output gap. Planned spending and actual output exceeds potential output. In this scenario, firms find that the demand for their output exceeds their normal rate of production.
