What factors would lead to a rise in the cost of credit in an economy, and in what circumstances - Essay Example
The formula, when applied, can show the annual rate of interest to be paid towards exhausting borrowed money. Acceptance of credit is often termed as a source of finance to a business due to the fact that it escalates with business expansion. (Siegel, et al, 1997)
A nation’s central bank can determine the cost of credit in an economy by either raising or lowering it. For instance; in 1989 the bank of Japan raised the rates of discount by 0.5% to 4.25%. Once the new rate took effect immediately, it would help in stabilising the economy’s prices by curbing the pressures due to inflation and enhance economic growth.
The discount rate is applied by the central bank while charging interests in the bank loans extended to other banks. Therefore, the raising of discount rates would amount to a rise in the cost of credit to the whole economy in entirety.
