Buying power is the estimation of a currency expressed as the measure of the quantity of good and services which a unit of money is able to purchase. Purchasing power is essential since the amount of goods or services you have the opportunity of purchasing will be decreased by inflation.
Variations in interest rates can affect spending habits of buyer depending on factors such as expected future rate changes, current rate levels, customer certainty and the general strength of the economy.
It is feasible for changes in interest rates to have an impact on the spending power of the consumer. It can either increase saving or diminishing spending. A definitive determinant of the general impact of changes in interest rate principally relies upon the disposition of buyers in the matter of whether they are better off saving or spending as a result of the changes in interest rate.
The economic theory of Keynesian refers to two opposing economic forces which can be impacted by changes in interest rate. This goes thus: the marginal propensity to save (MPS) as well as the marginal propensity to consume (MPC). These concepts fundamentally refer to the rate of changes in how much per dollar of disposable income which can be saved or spent by consumers.
Furthermore, a rise in interest rates may result in consumers to increase their savings, due to the fact that they have the opportunity of receiving higher return rates. A rise in interest rates is usually followed by a corresponding rise in inflation. As a result of this, consumers are often influenced to spend more once they think the dollars’ purchasing power will be affected by inflation. Also, a decreases in interest rates usually make consumers increase their spending.
However, the present level of rates and assumptions with respect to the future rate patterns are factors which tend to influence which way buyers incline. For instance, if rates drop from 8% to 6%, and additional rate decrease is anticipated, buyers may hold off on spending until there exist lower rates. On the off chance that rates are as of now at low levels, buyers will more often than not be impacted to spend more to exploit great financing terms.
Finally, the general strength of the economy impacts response of buyers to changes in interest rates. Even if rates are at low levels which may be even attractive, buyers will be unable to exploit financing in a discouraged economy. The confidence of consumers in the economy, coupled with future income prospects, likewise influences how much purchasers are willing to broaden themselves in spending and in financing commitments.
In the course of the past 30 years, interest rates have varied enormously with double digits rates in the 1980s, down to the almost 4% which is currently being encountered. Your buying or purchasing power is incredibly affected by the interest rate which is secured by you. Take action now before rates rise.