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In this wall, I will evaluate the factors affecting the fluctuation of interest rates.

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This video talks about why interest rates go up and down. Interest rates go up and down because of the things the federal reserve does. The federal reserve does this in order to control inflation.

I chose this video because it brings out the truth about why interest rates go up and down. I learnt that the Federal reserve is really involved in the whole cycle just so that it protects the economy of the country.

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How are Interest Rates Determined and What Affects Interest Rates

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Low interest rates means lower cost of borrowing money. This in another words means that low interest rates affect the economy negatively because the value of consumer goods and services becomes low which also which as well negatively affects the tax rate. The federal reserve will try to avoid such a situation which will lead to the interest rates going up.

I chose this because it talks about why falling interest rates affect the economy. The explanations gave the reasons for the factors that affect the fluctuation in interest rates.

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How Falling Interest Rates Move the Economy

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Increase in inflation leads to decrease in interest rates and increase in inflation leads to increase in interest rates. The decrease in purchasing power (increase in inflation) leads to high interest rates because lenders increase the interest rate in compensation for the decrease in the purchasing power of the money they are paid in the future.

I chose this video because the relationship between interest rates and inflation was clearly explained which enabled me to find other factors that affect the fluctuation of income.

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Inflation and Interest Rates: Relationship Explained (GUIDE)

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Increase in demand leads to an increase in interest rates and a decrease in demand leads to a decrease in the in the interest rates. An increase of supply leads to a decrease in the interest rate and a decrease of supply leads to an increase of the interest rates.

I chose this video because it clearly explains how money supply and demand impact interest rates.

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Money supply and demand impacting interest rates | Macroeconomics | Khan Academy

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Fluctuation of the interest rates is affected by various reasons depending on wherever the interest rates are applied. If you have a low credit score, you will be given high interest rates and if your credit score is higher, the interest rates would be lower.

This website gives twenty five factors that determine the interest rate and fully explains them.

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If you have or are currently lender shopping (financial best practice!) before deciding where to get your loan, you'll notice that the interest rate offered varies from place to place. Simply put, interest rate is a reflection of risk. When the market identifies a higher risk, this demands a higher rate of return.

There's always more to a lender than the interest rate alone, but there are around 26 different factors that go into quoting your interest rate.

Top 12 Factors that Determine Interest Rate

1. Credit Score
The higher your credit score, the lower the rate.

2. Credit History
The less credit history you have, the less knowledge a lender has of your repayment ability, possibly making you slightly more risky. The better the payment history, the better the rate.

3. Employment Type and Income
Self-employed, hourly employed, bonus-based pay - these all affect the risk factors of whether you'll be able to pay back the loan.

4. Loan Size
How much money are you asking for? Often if you are requesting an amount under a certain level (i.e.$100,000), there may be a slight increase in rate.

5. Loan-to-Value (LTV)
What percentage is your loan amount to the value of the property? Typically, the lower the percent, the lower the rate.

6. Loan Type
Fixed, variable, adjustable, balloon - these all have varying rates because of the variation of risks. Depending on the situation, your initial interest rate may be lower with an adjustable rate than with a fixed rate but you run the risk of the rate increasing significantly later on.

7. Length of Term
The shorter the term on your loan, the quicker you'll be paying down the debt; possibly resulting in a better rate. It's important to note that your payments will most likely be higher, so you'll want to make sure you can afford it.

8. Payment Frequency
Because of the agriculture industry's unique nature, if you elect for a payment plan that allows for an annual or semiannual payment rather than a monthly one, you can expect a higher rate.

9. Property Type
A residential house will have a lower interest rate than a commercial farm on 50 acres because of the increased risk that comes with a farm loan. Purchasing a farm or land is different because there aren't as many properties for value comparison, buyers or people that can afford to.

10. Co-borrowers
Will there be other people on the loan, and if so, what does their credit look like? All parties involved in the loan will be used in determining the rate.

11. Debt Ratio
How much money is made monthly versus the cost of monthly bills. The typical ratio that lenders looks at is 42%.

12. Documentation Available
Are you able to produce all documentation (bank statements, taxes, retirement accounts, etc.) to show your assets? This will help ease the risk factors for a lender and help lower the rate.

14 Other Factors that could affect your Interest Rate

1. Escrow Preference
Some lenders require escrows for residential or consumer loans. This means specific money put aside to pay for things like taxes, insurance, etc. If you choose not to escrow, your rate could be higher due to higher risk.

2. Closing Date
Depending on the market temperament, it can be important to lock in on a rate that is as close to your closing date as possible. The longer the rate lock period, the higher the rate will be.

3. Occupancy Type
Typically, rental or investment properties have higher interest rates.

4. Residency
Rates will be lower if you plan to live in the house full-time versus using it as a second home.

5. Available Assets
What additional assets do you have as possible collateral? The more down payment you have, usually the lower the rate.

6. Asset Seasoning
How long have you had your assets? There may be restrictions for assets owned under a certain time frame that could affect the rate.

7. Housing Ratio
What does the ratio from above look like when you add in the cost of the mortgage? Usually a good housing ratio is 28%.

8. Improvements Needed
This will affect the value of the property. Remember that the lower the percentage of the loan amount to the value of the property, typically the better the rate.

9. Employment History
This also affects the risk to the lender. If you show a consistent history of employment, the better chance for a lower rate.

10. Relocation
Are you being temporarily or permanently relocated by an employer? That will determine if the house is considered a secondary (higher rate) or primary residence (lower rate).

11. Seller Contributions
If the seller is able to contribute money towards closing costs, that will increase the amount you have available for a down payment.

12. Gifts
Again, lowering the amount of loan you'll need with gifts from family members will help to lower the interest rate.

13. Cash-out
If you refinance and want to walk away from closing with money in your pocket, you may be increasing the percentage of loan to property value.

14. Combined Loan-to-Value (CLTV)
This ratio includes not only the current loan you are wanting, but any additional loans on the property, such as a home equity.

You don't have to remember all of these, but if your lender is quoting you a rate without asking some of these questions, be sure to ask them what criteria they are using to factor your rate.

How to Compare Loans side by side

There's more to a loan than just the interest rate.

Yes, the interest rate is important and is probably one of the first questions you want to ask, however, don't forget to find out the following:

Can you reset the loan at a lower rate if interest rates come down? How much will it cost you?

Is there a prepayment penalty if you want to pay ahead or pay the loan in full?

Does the lender give great service?

Do they answer the phone or return calls promptly?

Can the lender get the loan completed in a timely manner?

A few key things you should compare may include (but may not be limited to) some or all of the following:

Application fees

Appraisal costs

Settlement costs

Attorney fees

Title insurance costs

Loan origination fees

Servicing fees

If you have any questions about how this works with Farm Credit or what your interest rate could be, give us a call to speak directly with a Loan Officer or fill out the form on our contact us page.

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26 Factors Determining your Interest Rate

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If you have or are currently lender shopping (financial best practice!) before deciding where to get your loan, you'll notice that the interest rate offered varies from place to place. Simply put, interest rate is a reflection of risk. When the market identifies a higher risk, this demands a higher rate of return.

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An increase in the amount of money made available for borrowers increases the supply of credit. The more the supply of the money increases the more the interest rate decreases. When the borrowers delay to pay back, the interest rates keep on increasing. This in other words increases the interest rate that has to be paid back.

I chose this website because it fully explains the forces behind interest rates and what causes them to rise and fall. This helped me get to know the factors of the fluctuation of interest rates.

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An interest rate is the cost of borrowing money. Or, on the other side of the coin, it is the compensation for the service and risk of lending money. In both cases it keeps the economy moving by encouraging people to borrow, to lend, and to spend. But prevailing interest rates are always changing, and different types of loans offer different interest rates. If you are a lender, a borrower, or both, it's important you understand the reasons for these changes and differences.​ They also have a heavy effect on the rare metals trade, including silver stocks.

Lenders and Borrowers

The money lender takes a risk that the borrower may not pay back the loan. Thus, interest provides a certain compensation for bearing risk. Coupled with the risk of default is the risk of inflation. When you lend money now, the prices of goods and services may go up by the time you are paid back, so your money's original purchasing power would decrease. Thus, interest protects against future rises in inflation. A lender such as a bank uses the interest to process account costs as well.

Borrowers pay interest because they must pay a price for gaining the ability to spend now, instead of having to wait years to save up enough money. For example, a person or family may take out a mortgage for a house for which they cannot presently pay in full, but the loan allows them to become homeowners now instead of far into the future.

Businesses also borrow for future profit. They may borrow now to buy equipment so they can begin earning those revenues today. Banks borrow to increase their activities, whether lending or investing and pay interest to clients for this service.

Interest can thus be considered a cost for one entity and income for another. It can represent the lost opportunity or opportunity cost of keeping your money as cash under your mattress as opposed to lending it. And if you borrow money, the interest you have to pay could be less than the cost of forgoing the opportunity of having access to the money in the present.

How Interest Rates are Determined

Supply and Demand

Interest rate levels are a factor of the supply and demand of credit: an increase in the demand for money or credit will raise interest rates, while a decrease in the demand for credit will decrease them. Conversely, an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them.

An increase in the amount of money made available to borrowers increases the supply of credit. For example, when you open a bank account, you are lending money to the bank. Depending on the kind of account you open (a certificate of deposit will render a higher interest rate than a checking account, with which you can access the funds at any time), the bank can use that money for its business and investment activities. In other words, the bank can lend out that money to other customers. The more banks can lend, the more credit is available to the economy. And as the supply of credit increases, the price of borrowing (interest) decreases.

Credit available to the economy decreases as lenders decide to defer the repayment of their loans. For instance, when you choose to postpone paying this month's credit card bill until next month or even later, you are not only increasing the amount of interest you will have to pay but also decreasing the amount of credit available in the market. This, in turn, will increase the interest rates in the economy.

Inflation will also affect interest rate levels. The higher the inflation rate, the more interest rates are likely to rise. This occurs because lenders will demand higher interest rates as compensation for the decrease in purchasing power of the money they are paid in the future.

Government

The government has a say in how interest rates are affected. The U.S. Federal Reserve (the Fed) often makes announcements about how monetary policy will affect interest rates.

The federal funds rate, or the rate that institutions charge each other for extremely short-term loans, affects the interest rate that banks set on the money they lend. That rate then eventually trickles down into other short-term lending rates. The Fed influences these rates with "open market transactions," which is the buying or selling of previously issued U.S. securities. When the government buys more securities, banks are injected with more money than they can use for lending, and the interest rates decrease. When the government sells securities, money from the banks is drained for the transaction, rendering fewer funds at the banks' disposal for lending, forcing a rise in interest rates.﻿﻿

Types of Loans

Of the factors detailed above, supply and demand are, as we implied earlier, the primary forces behind interest rate levels. The interest rate for each different type of loan, however, depends on the credit risk, time, tax considerations (particularly in the U.S.), and convertibility of the particular loan.

Risk refers to the likelihood of the loan being repaid. A greater chance that the loan will not be repaid leads to higher interest rate levels. If, however, the loan is "secured," meaning there is some sort of collateral that the lender will acquire in case the loan is not paid back (i.e., such as a car or a house), the rate of interest will probably be lower. This is because the risk factor is accounted for by the collateral.

For government-issued debt securities, there is, of course, minimal risk because the borrower is the government. For this reason, and because the interest is tax-free, the rate on treasury securities tends to be relatively low.

Time is also a factor of risk. Long-term loans have a greater chance of not being repaid because there is more time for the adversity that leads to default. Also, the face value of a long-term loan, compared to that of a short-term loan, is more vulnerable to the effects of inflation. Therefore, the longer the borrower has to repay the loan, the more interest the lender should receive.

Finally, some loans that can be converted back into money quickly will have little if any loss on the principal loaned out. These loans usually carry relatively lower interest rates.

The Bottom Line

As interest rates are a significant factor of the income you can earn by lending money, of bond pricing and of the amount you will have to pay to borrow money, it is important that you understand how prevailing interest rates change: primarily by the forces of supply and demand, which are also affected by inflation and monetary policy. Of course, when you are deciding whether to invest in a debt security, it is important to understand how its characteristics determine what kind of interest rate you can receive.

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What Are the Forces Behind Interest Rates and What Causes Them to Rise?

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An interest rate is the cost of borrowing money. Or, on the other side of the coin, it is the compensation for the service and risk of lending money. In both cases it keeps the economy moving by encouraging people to borrow, to lend, and to spend.

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In a growing economy, the demand of money is high because most of the companies keep on borrowing money from banks in order to expand their businesses. This is also promoted by the high demand of products by the consumers from the companies. The higher the demand for the money, the higher the interest rates.

I chose this website because it really explains the whole cycle of fluctuation of interest rates by explaining the factors that influence interest rates in an economy.

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Reserve Bank of India has cut the repo rate by 25 basis points in the maiden monetary policy review of the calendar year 2019. It indicates interest rates in the economy are on their way down. Besides the repo rate, following are a few factors that influence the interest rates in the economy. Here are they:

Demand for money: Typically, in a growing economy, money is in demand. Manufacturing sector companies and industries need to borrow money for their short-term and long-term needs to invest in production activities. Citizens need money as they need to borrow for their homes, buy new cars, and other needs. But when an economy isn't doing that well, companies avoid borrowing if the demand for their products is low.

A very high inventory is detrimental, so they produce less. In effect, they borrow less, ergo less demand for money. Consumers also spend less as a bad economy could result in job loss. Other things remaining the same, higher the demand for money higher the interest rates.

Supply of money: Like any other commodity, if the supply of money increases, other things remaining the same the price of money-interest rates, go down.

There are situations wherein the investors do not have attractive avenues and they chase the bonds or deposits. If there is no demand for that money at that moment, then the interest rates go down.

In recessionary times the interest rates tend to go down. A case in point is the sudden dip that took place in bond yields for a short period of time after the announcement of demonetisation.

As the general public deposited the demonetised currency notes into bank accounts, banks were flooded with money. The banks could not lend all that money so they choose to invest in government securities and that led to a fall in yields on bonds. Please note that fall in bond yields was temporary.

Fiscal deficit and government borrowing: Fiscal deficit is a result of government expenditure exceeding government revenue. To fund this deficit, the government resorts to borrowing. Being the largest borrower in the economy, the quantum of government borrowing influences the demand for money and in turn sways interest rates.

Higher the fiscal deficit, higher the government borrowing, higher the interest rates. Generally, bond markets respond to higher fiscal deficits by an uptick in bond yields.

Inflation: Prices of all goods and commodities are set by taking into account the general price increase in the economy-inflation. Interest rates, which the price of money, are no exception to this rule.

Savers need to be compensated by way of higher interest rates for sacrificing their current consumption motives in a high inflationary scenario. Investors will forgo their current consumption and invest in fixed income investments if they get positive real rate of return.

The real rate of return is arrived at by deducting inflation number from the nominal rate of return offered on the bonds and deposits. The ideas to keep the real rate of return positive so that after inflation the saver saves something. That means in high inflation era, the interest rates tend to stay up and vice versa.

Global interest rates and foreign exchange rates: Integration of Indian economy with the global economy has risen compared to what it was prior to acceptance of globalisation in 1991. That means the interest rates in the economy must be set in line with global trends in interest rates.

If India wants to attract global capital then the interest rates in India need to go up if the interest rates are going up globally. There are occasions such as the Lehman Crisis in 2008 when the central bankers across the globe choose to cut interest rates to pull the global economy out of recession.

Attractive interest rates bring in capital and support the foreign exchange rate. Tweaks in the interest rates in the economy can be used by a central bank for influencing the exchange rate. A central bank may choose to up the policy rates (repo rate in India) to indicate higher interest rates in the economy and thereby attract capital from overseas investors.

Central bank: Reserve Bank of India chooses to focus on various objectives while preparing its monetary policy. In a boom phase, the central bank may focus to contain inflation and hence may choose to hike interest rates. That curtails the consumption and investments driven by borrowed money. In a recessionary period, the central bank may want to induce growth by incentivising consumption and investments by reducing the interest rates. Central bank's monetary policy objectives thus influence the interest rates.

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Explainer: Six Factors That Influence Interest Rates In An Economy

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Reserve Bank of India has cut the repo rate by 25 basis points in the maiden monetary policy review of the calendar year 2019. It indicates interest rates in the economy are on their way down. Besides the repo rate, following are a few factors that influence the interest rates in the economy.

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When you lend money now, the prices of goods and services may go up by the time you are paid back, so your money's original purchasing power may decrease. Due to this kind of inflation, this will lead to an increase or a decrease of the interest rates depending on whether the purchasing power increases or decreases thus leading to fluctuation of interest rates.

I chose this website because it gave me a better understanding of inflation and how it affects the fluctuation of interest rates.

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An interest rate is the cost of borrowing money. Or, on the other side of the coin, it is the compensation for the service and risk of lending money. In both cases it keeps the economy moving by encouraging people to borrow, to lend, and to spend. But prevailing interest rates are always changing, and different types of loans offer different interest rates. If you are a lender, a borrower, or both, it's important you understand the reasons for these changes and differences.​ They also have a heavy effect on the rare metals trade, including silver stocks.

Key Takeaways

Lenders and Borrowers

The money lender takes a risk that the borrower may not pay back the loan. Thus, interest provides a certain compensation for bearing risk. Coupled with the risk of default is the risk of inflation. When you lend money now, the prices of goods and services may go up by the time you are paid back, so your money's original purchasing power would decrease. Thus, interest protects against future rises in inflation. A lender such as a bank uses the interest to process account costs as well.

Borrowers pay interest because they must pay a price for gaining the ability to spend now, instead of having to wait years to save up enough money. For example, a person or family may take out a mortgage for a house for which they cannot presently pay in full, but the loan allows them to become homeowners now instead of far into the future.

Businesses also borrow for future profit. They may borrow now to buy equipment so they can begin earning those revenues today. Banks borrow to increase their activities, whether lending or investing and pay interest to clients for this service.

Interest can thus be considered a cost for one entity and income for another. It can represent the lost opportunity or opportunity cost of keeping your money as cash under your mattress as opposed to lending it. And if you borrow money, the interest you have to pay could be less than the cost of forgoing the opportunity of having access to the money in the present.

How Interest Rates are Determined

Supply and Demand

Interest rate levels are a factor of the supply and demand of credit: an increase in the demand for money or credit will raise interest rates, while a decrease in the demand for credit will decrease them. Conversely, an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them.

An increase in the amount of money made available to borrowers increases the supply of credit. For example, when you open a bank account, you are lending money to the bank. Depending on the kind of account you open (a certificate of deposit will render a higher interest rate than a checking account, with which you can access the funds at any time), the bank can use that money for its business and investment activities. In other words, the bank can lend out that money to other customers. The more banks can lend, the more credit is available to the economy. And as the supply of credit increases, the price of borrowing (interest) decreases.

Credit available to the economy decreases as lenders decide to defer the repayment of their loans. For instance, when you choose to postpone paying this month's credit card bill until next month or even later, you are not only increasing the amount of interest you will have to pay but also decreasing the amount of credit available in the market. This, in turn, will increase the interest rates in the economy.

Inflation will also affect interest rate levels. The higher the inflation rate, the more interest rates are likely to rise. This occurs because lenders will demand higher interest rates as compensation for the decrease in purchasing power of the money they are paid in the future.

Government

The government has a say in how interest rates are affected. The U.S. Federal Reserve (the Fed) often makes announcements about how monetary policy will affect interest rates.

The federal funds rate, or the rate that institutions charge each other for extremely short-term loans, affects the interest rate that banks set on the money they lend. That rate then eventually trickles down into other short-term lending rates. The Fed influences these rates with "open market transactions," which is the buying or selling of previously issued U.S. securities. When the government buys more securities, banks are injected with more money than they can use for lending, and the interest rates decrease. When the government sells securities, money from the banks is drained for the transaction, rendering fewer funds at the banks' disposal for lending, forcing a rise in interest rates.﻿﻿

Types of Loans

Of the factors detailed above, supply and demand are, as we implied earlier, the primary forces behind interest rate levels. The interest rate for each different type of loan, however, depends on the credit risk, time, tax considerations (particularly in the U.S.), and convertibility of the particular loan.

Risk refers to the likelihood of the loan being repaid. A greater chance that the loan will not be repaid leads to higher interest rate levels. If, however, the loan is "secured," meaning there is some sort of collateral that the lender will acquire in case the loan is not paid back (i.e., such as a car or a house), the rate of interest will probably be lower. This is because the risk factor is accounted for by the collateral.

For government-issued debt securities, there is, of course, minimal risk because the borrower is the government. For this reason, and because the interest is tax-free, the rate on treasury securities tends to be relatively low.

Time is also a factor of risk. Long-term loans have a greater chance of not being repaid because there is more time for the adversity that leads to default. Also, the face value of a long-term loan, compared to that of a short-term loan, is more vulnerable to the effects of inflation. Therefore, the longer the borrower has to repay the loan, the more interest the lender should receive.

Finally, some loans that can be converted back into money quickly will have little if any loss on the principal loaned out. These loans usually carry relatively lower interest rates.

The Bottom Line

As interest rates are a significant factor of the income you can earn by lending money, of bond pricing and of the amount you will have to pay to borrow money, it is important that you understand how prevailing interest rates change: primarily by the forces of supply and demand, which are also affected by inflation and monetary policy. Of course, when you are deciding whether to invest in a debt security, it is important to understand how its characteristics determine what kind of interest rate you can receive.

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What Are the Forces Behind Interest Rates and What Causes Them to Rise?

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An interest rate is the cost of borrowing money. Or, on the other side of the coin, it is the compensation for the service and risk of lending money. In both cases it keeps the economy moving by encouraging people to borrow, to lend, and to spend.

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This image shows us four factors that affect the level of interest rates. These factors are; production opportunities, Time preference for consumption, risk and expected inflation. I will explain risk because lenders go through a risk by lending their money which they might or might not get back on time. If all borrowers are paying back on time it means that more money will be available for credit which decreases the interest rate compared to when its not available.

I chose this picture because it clearly outlines some of the factors that affect the fluctuation of interest rates.

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factors affecting fluctuation of interest rates - Bing

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Find high-quality images, photos, and animated GIFS with Bing Images

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The above picture shows the fluctuation of the interest rate of bank of Canada. The fluctuation was caused by various factors but I will focus more on inflation. The cost of goods six years is not the same as now due to the decrease in purchasing power (increase in inflation). When inflation increases interest rates increase and when the purchasing power is constant, the interest rates tend to stay constant as well.

I chose the above picture because it shows a graph of Bank of Canada key interest rate movements. Analyzing thus picture helped me evaluate the factors that affect the fluctuation of interest rates.

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Find high-quality images, photos, and animated GIFS with Bing Images