Interest rates are defined as "an interest rate is the percentage yield on a financial security such as a bond or a share and there is a relationship between the interest rate and the price of a financial asset such as a bond."
The way to look at interest rates is to assume interest rates control the price of borrowing money. The reserve bank sets the interest rate depending on the economic situation in the country.
By changing interest rates, it has different effects for the general public and businesses.
-High interest rates will reduce money tied up in stock and release capital as organisations seek to avoid an overdraft.
-Rises in interest rates will strengthen the Australian dollar and encourage the foreign investors to put money into the Australian economy.
The government uses the monetary policy in Australia, which helps the Australian economy, deal with two points. They are;
Â· It affects and controls the supply of money circulating in the economy.
Â· It affects interest rates and exchange rates.
The Australian reserve bank and the Australian government use the policy to influence the level of demand, investment, inflation, employment and growth. The Australian government uses the policy to encourage or discourage the amount of money consumers and organisations spent.
One way the Australian government and reserve bank can lower interest rates is to buy government securities from a bank in what is called a 'open market transaction'
The reserve pays for the securities by increasing that banks reserves, then with more reserve on hand, banks can lend more money to consumers and businesses, driving interest rates lower.