Explain how savers would respond if the interest rate on savings accounts increased. Would they increase or decrease their amount of savings? What about borrowers? Would they increase or decrease their amount of borrowing if the interest rate on loans increased? Explain why.

What is interest rate?

Interest rate is an amount charged by a lender to a borrower for any form of debt given, generally expressed as a percentage of the principal.

Interest rate to savers

Higher interest rate encourages savings. When interest rate increases, people tend to save more so as to earn more interest on their deposits.

The above means that savers will increase their amount in savings if the interest rate on savings accounts increases.

Interest rate to borrowers

Higher interest rate discourages lenders from borrowing more. More interest rate means that they would have to pay back more money on the loan amount they borrowed.

It therefore means that borrowers will decrease the amounts of borrowing if the interest rate on loans increases.

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1. Savers increase their savings as interest rate increases

2. Borrowers decrease their borrowing as interest rate on loans increases

Explanation:

1.

Interest rates are a great determinant of what those who save money get on their deposits. When interest rate increases, people tend to save more so as to earn more interest on their deposits. So it encourages savings. Therefore as interest rate increases savers would increase their amount of savings.

2.

For borrowers, more interest rate on loan amount discourages borrowing. More interest rate means that they would have to pay back more money on the loan amount they borrowed. This implies a rise in the cost of borrowing. So the borrower decreases the amount of borrowing if interest rate on loan increases.

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