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HOMOGENEOUS: In general, the notion that everything has identical characteristics. For example, a neighborhood might have a homogeneous culture, meaning everyone has similar income, religious preferences, and political views. In economics, it is used in a couple of different ways. One is for production, such that two or more goods are homogeneous if they are physically identical or at least viewed as identical by buyers. Another is for mathematical equations, such that an equation is said to be homogeneous if the independent variables are increased by a constant value, then the dependent variable is increased by a function of that value. In a marketing context, this is a market characterized by buyers with similar needs and wants. This group is targeted with an undifferentiated targeting strategy. The company uses only one marketing mix to satisfy this group of buyers.
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INTEREST RATES, AGGREGATE EXPENDITURES DETERMINANT: One of several specific aggregate expenditures determinants assumed constant when the aggregate expenditures line is constructed, and that shifts the aggregate expenditures line when it changes. A decrease in interest rates cause an increase (upward shift) of the aggregate expenditures line. An increase in interest rates cause a decrease (downward shift) of the aggregate expenditures line. Other notable aggregate expenditures determinants include consumer confidence, federal deficit, inflationary expectations, and exchange rates. Interest rates are the annual charge for borrowing funds, usually specified as a percent of the amount borrowed. Changes in interest rates affect the overall expense of borrowing and thus expenditures undertaken with the borrowed funds. Higher interest rates tend to decrease expenditures and lower interest rates lead to an increase expenditures.Most investment expenditures by the business sector and a fair amount of consumption expenditures by the household sector (especially for durable goods) are made with borrowed funds and are thus affected by changes in interest rates. - Businesses typically borrow the funds needed for capital goods, such as factories and equipment.
- Households often borrow the funds used to buy durable goods, such as cars and furniture.
The expense of borrowing these funds depends on interest rates. Higher interest rates add to the overall cost of these expenditures. Lower interest rates reduce the overall cost of these expenditures. This means that changes in interest rates trigger changes in consumption expenditures and investment expenditures, and thus aggregate expenditures.What It DoesInterest Rates |
| The exhibit to the right presents a standard Keynesian aggregate expenditures line. Like all aggregate expenditures lines, this one is constructed based on several ceteris paribus aggregate expenditures determinants, such as interest rates. They key question is: What happens to this aggregate expenditures line if interest rates change?Lower Interest RatesSuppose, for example, that the Federal Reserve System decides to implement expansionary monetary policy. Fearing an impending recession on the business-cycle horizon, they decide to expand the money supply with a corresponding decrease in interest rates.A decline in interest rates can entice the business sector to boost investment expenditures. For example, a 1 percentage point interest rate decline (such as from 10 percent to 9 percent) can reduce the total interest cost on a $10 million construction loan by $300,000 over a five-year repayment period. This saving is bound to convince a few firms to undertake extra investment expenditures. While the numbers might be smaller, a decline in interest rates is also likely to entice the household sector to boost consumption expenditures on durable goods. For example, a 1 percentage point interest rate decline can reduce the total interest cost on a $20,000 car loan by $6,000 over a five-year repayment period. This reduction in cost is also bound to convince a few households to make extra consumption expenditures. To see how lower interest rates affect the aggregate expenditures line, click the [Lower Rates] button. The lower rates trigger an increase in aggregate expenditures, which is an upward shift of the aggregate expenditures line. Higher Interest RatesAlternatively, the Federal Reserve System might decide to implement contractionary monetary policy. Fearing the onset of higher inflation, the folks at the Fed might decide to reduce the money supply and subsequently increase interest rates. Higher interest rates have the opposite effect on both business investment and household consumption as lower rates. The interest cost of constructing a new factory is higher. So too is the interest expense of buying a new car.To see how higher interest rates affect the aggregate expenditures line, click the [Higher Rates] button. The higher rates trigger a decrease in aggregate expenditures, which is a downward shift of the aggregate expenditures line. What Does It Mean?Changes in aggregate expenditures due to interest rates are important for a couple of reasons.- Business Cycle: Interest rates tend to rise and fall over the expansions and contractions of the business cycle. During an expansion, especially near the end of the expansion, interest rates tend to rise. Then once a contraction sets it, interest rates tend to fall. In fact, these interest rate changes are part of the "natural" business cycle mechanism. Higher interest rates during an expansion cause the decline in aggregate expenditures that result in a contraction. Lower interest rates during a contraction then cause the rise in aggregate expenditures that result in an expansion.
- Monetary Policy: Interest rates are also affected by monetary policy that is designed to counter business-cycle instability. Expansionary monetary policy involves lower interest rates intended to increase aggregate expenditures and offset a contraction and address the problems of unemployment. Contractionary monetary policy involves higher interest rates intended to decrease aggregate expenditures and offset an expansion and address the problems of inflation.
Recommended Citation:INTEREST RATES, AGGREGATE EXPENDITURES DETERMINANT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: November 4, 2024]. Check Out These Related Terms... | | | | | | | | | | | | Or For A Little Background... | | | | | | | | | | | | And For Further Study... | | | | | | | | | | | | | |
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Today, you are likely to spend a great deal of time flipping through the yellow pages looking to buy either a large flower pot shaped like a Greek urn or a small palm tree that will fit on your coffee table. Be on the lookout for mail order catalogs with hidden messages. Your Complete Scope
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Post WWI induced hyperinflation in German in the early 1900s raised prices by 726 million times from 1918 to 1923.
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"Kites rise highest against the wind, not with it. " -- Winston Churchill, British prime minister
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DCFM Discounted Cash Flow Method
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