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Lower interest rates increase your relative propensity to spend by lowering the opportunity cost of consumption. For example, if you have $10K and can get only
by lexcorvus 11y ago
Lower interest rates increase your relative propensity to spend by lowering the opportunity cost of consumption. For example, if you have $10K and can get only a 1% annual return, you might as well take that trip to Vegas. If you could get a 15% return, though, you might rather stay home and rake in the interest.
- eru 11y agoOK, you basically have to compare your own internal discounting rate of consumption with the public rate of interest offered on savings. If your own internal rate is higher than the public one, then indeed you should borrow to consume (or put off saving). Companies only care about the public rate---if they have a higher rate of reliable return internally, they can keep borrowing money to invest until there's an equilibrium. A low interest rate makes companies more forward looking.