Effects of Interest Rates on Consumer Purchasing Term Paper

Effects of Interest Rates on Consumer Purchasing - Term Paper Example An increase in interest rates may have different effects on the consumer buying behaviors. One of the effects is that it causes a rise in borrowing cost. Therefore, consumers are going to be discouraged to borrow or save. The increased interests will leave consumers with little disposable income and therefore this will reduce consumption or consumer buying   (Soderlind, p.402). Another effect of a rise in interest rates on consumer behavior is the desire to save rather than to spend. The consumers will tend to save their money since they will be encouraged by the high-interest rates the banks offer. The value of the dollar increases with a rise in interest rates. One cause for the increase is the increased money flows. Therefore, investors are more likely to save in US banks if the US rates are high compared to other countries. The main result of a stronger dollar is that it makes exporting from the US not to be competitive leading to  increase in exports and a reduction in imports. In the long run, consumer consumption will have reduced in places outside the United States of America. Increased interest rate reduces the buyers’ willingness to make investments, as well as risky purchases. Consequently, they shy off from borrowing and end up saving for fear of losing their money. In such cases, demand for products reduces and there is a general reduction in consumer expenditure on goods (Esch, p. 302). The rise in interest rates has the general effect of reducing the consumers’ demand for purchasing products. In the case of an increase, consumers try to save and spend less due to a reduced disposable income. On the other side, a reduction in the interest rates will affect the consumers buying behavior in various ways. One way is that lower interest rates will result in reduced returns on savings.