hey all I need you to do is go through my essay and look at every note on the side and make the changes and make sure the essay is the best it can be - and ask me anything for clarification
Why are interest rates generally so low at present? Contents Introduction:3 Saving-investment equilibrium models:3 Demographic trend and interest rate:5 Technology trends and interest rate5 Negative interest rate and its implication6 Impact of Covid 19 on Australian economy7 Introduction: Interest is the cost of borrowing money as well as the money earned from savings. In other words, if you borrow money from a bank, the interest is the cost of the loan. When you deposit money in a savings account, the bank will pay you interest on your savings. Interest rates express this expense or return as a percentage of the amount borrowed or lent.Comment by Aaron Williams: This paragraph seems …. messy. I think this should be streamlined, the idea you have here is good. To explain what the interest rate is. But maybe be a little more definitive, such as:“The interest rate is a key macroeconomic variable that is used to observe the state of the economy. It composites two functions, the cost of borrowing, and the return on savings. Investing often requires the use of borrowed money, the cost of borrowing is expressed through the interest rate, whereas the return on savings is similarly represented through the interest rate.”This sounds a lot nicer if you will. The nominal interest rate is the rate that is agreed upon and paid. For example, it may be the interest rate on a mortgage or the rate of return on savings deposits. Borrowers pay the nominal interest rate, while savers collect it. Borrowers and savers are concerned not only with the nominal payment, but also with how much products, services, or other items they may purchase with that money. Economists refer to this as money's buying power. It typically declines over time as prices increase as a result of inflation. When inflation is factored in, the actual cost of interest and the real return on investment are shown. Comment by Aaron Williams: This is too informal, sounds like a conversation. You need to make this more formal, for example, “the nominal interest rate is what is observed in the economy”. Comment by Aaron Williams: Again all of this is too informal, remove it all. Find a way to state this that isn’t so conversational.Comment by Aaron Williams: Who? Quote where you got this from.Comment by Aaron Williams: Who said this? Comment by Aaron Williams: Now you’re talking about inflation, but you have introduced it, not as a definitive key point, but as an offhand comment. You should explain the interest rate and inflation rate relationship together in a whole paragraph. Comment by Aaron Williams: Add a paragraph that defines the real rate and the inflation rate and the nominal interest rate. Then explain their interactions, the Fisher Equation. Saving-investment equilibrium models:Comment by Aaron Williams: You need an academic article that backs up this model, which model are you referring to? The household sector and the corporate sector are all included in this saving-investment model.Comment by Aaron Williams: You need to introduce what you are talking about first, before talking about components of the model.ie/ what does the IS model explain?what are the key variables used?What are the components in the model?How does the model work?You have skipped the first few of those questions and jumped right into the mechanics of the model. Household Sector: Anyone in an economy that buys goods and services is included in the household sector. It refers to an economy's entire workforce. The household sector is in control of gross domestic product spending expenses.Comment by Aaron Williams: These definitions are long winded and too wordy, remember the target audience, meaning that you can assume you don’t need to overly explain what they are. Just don’t use the word in the definition. Economic Sector: The business sector consists of the economy's individual, profit-seeking businesses that combine finite capital to provide wants-and-needs fulfilling goods and services. The private sector is in control of gross domestic product spending investments. In a simplistic macroeconomics model with no government spending and no foreign market, we have: Y = C + S, where S represents personal savings, Y represents real GDP, and C represents real demand spending.Comment by Aaron Williams: No s requiredComment by Aaron Williams: When explaining components go LEFT to RIGHT, so start with Y represents GDP (nominal since its not divided by $P), C represented consumer spending, and S represents consumer savings. Real GDP is calculated as a flow of earnings that are either spent or saved. In a state of equilibrium, all profits are expended. We only have two forms of spending: C and I, which stands for savings.Comment by Aaron Williams: I think if you’re doing the IS relation you need to redo your setup as it feels very clunky. As a result, Y = C+I, or Real GDP, is expended on consumption and investment in equilibrium. As we substitute for how profits are distributed, we get C + S = C + I or I = S. As a result, in a simplistic model, macroeconomic equilibrium can be expressed as I = S, or planned investment spending equals planned personal savings.Comment by Aaron Williams: Ok so you have set up the model, have you answered “what does the model do?”“what does the model answer?”Only once you have explained the importance of the model, can you use it to answer your question. However, suppose investment spending increases as a result of changes in individual expectations toward the future, such that investment spending is higher at all interest rates, as seen by the curve I'(r) in the diagram. The equilibrium interest rate will then increase before savings and spending are equal again. [In the diagram, point F] If this occurs, all investment consumption and savings levels will increase until they are equal again. Savings and spending are still equal, so the amount of economic activity will not change, but the composition of economic activities is different. Comment by Aaron Williams: We are supposed to be answering why the interest rate is so low, this explanation is useless. Instead what you should do, is write a paragraph (3 sentences) on why our aging population is causing the interest rate to be so low, or something like that. The point is, that we aren’t saving / or investing as much anymore, possibly due to the wealth inequality. This causes the I curve to move left, and the S curve to move right, resulting in an even lower real rate of interest. Remember the point of introducing and explaining this model is to show WHY the interest rate is so low. This explanation is an arbitrary example of when investment increases. This feels like a textbook answer. We have more savings spending, more borrowing, and less consumption spending at point F. A change in I(r) or S(r) causes a redistribution of production between spending and saving, but no change in output ratio. A change to the right by the I(r) curve would result in more spending and less demand, resulting in higher economic growth. Demographic trend and interest rate: Population ageing is a natural reason and, as we can see, it is a problem that has important implications for household savings. Savings differ over our lifetimes in an inverted U-shaped pattern, according to the life cycle hypothesis established by Nobel Laureates in Economics Franco Modigliani and Milton Friedman, among others: the theory assumes that the young and elderly save the least, while the middle-aged save the most. The need to preserve a reasonably consistent standard of life over time drives this trend. To do this, people must invest more at younger ages where their income is higher, and then use these opportunities to increase their quality of life at older ages where their income is smaller (typically, youth and old age).Comment by Aaron Williams: “population aging is a natural reason…”what does this mean?How you should introduce this paragraph is, “Over the course of a lifetime, individuals tend to save at different rates. Midigliani and Milton (REF) proposed a theory of [theory name] which attempts to explain this. They propose that …. Second, lower birth rates alter savings and income requirements in various ways. In the one hand, it contributes to lower population growth, which translates into lower GDP growth and, as a result, lower growth in investment demand, which tends to lower interest rates. Lower mortality, on the other hand, increases the percentage of the population made up of the aged, who have lower investment rates but higher amounts of money (as a result of the savings accumulated throughout their working life).Comment by Aaron Williams: Ok I get what you are trying to say. But now you need to bring it back to WHY is our interest rate so low? Recent births, deaths, ages, etc etc. Find statistics to back up your claims. Technology trends and interest rate A faster rate of technological transition increases the actual rate of return on new acquisitions, perhaps dramatically. To put it another way, a faster rate of technological transition makes acquisitions in capital goods using emerging technologies more profitable. When the firms consider emerging technology opportunities, capital investment will increases to capitalize on the new benefit opportunities. The jobs and income provided by capital goods spending by businesses stimulates customer spending and triggers another round of investment spending. Such mechanisms, known as multiplier-accelerator effects by economists, will occur as long as the real rate of return on a new construction project surpassed the real cost of labor on that project. Advancement on the supply side of the economy produces a corresponding rise in overall demand by this mechanism. Market interest rates must grow in order to sustain a balance between increased demand for investment funds and available liquidity. Globalization and interest rate: The power of the central bank to control the real interest rate is a critical component of the monetary transmission process. Changes in real interest rates affect spending on durable goods, which is a part of total expenses. However, there is another channel of power. If the Fed lowers interest rates, for example, demand for dollars to invest in Australian stock markets will fall. This will lower the value of the dollar in international currencies. The weakened dollar ensures that products manufactured in the United States are less expensive, so Australia exports will rise while imports will fall.Comment by Aaron Williams: Again this entire section doesn’t add anything to WHY the level of interest is so low. This tells me about how investment and technology affect the interest rate, but not why the interest rate is so low. Negative interest rate and its implicationComment by Aaron Williams: I would probably remove this section entirely.Comment by Amanuel Assefa: Since higher interest rates make borrowing by households and firms more costly, the Fed increases interest rates to help cushion the economy against inflation.