This is a good explanation of the ABC. The only caveats I would make are the following:
1) The video says that the interest rate is the price of money. I understand the point, but to say that the interest rate is the price of money is either incorrect or too narrow a definition. Strictly speaking, the interest rate is not the price of money but the price of loanable funds. The price of something is what a person must offer in order to obtain it. But one can obtain money in ways other than simply offering to pay interest on it. A grocer obtains money by selling fruits and vegetables to his customers. What is the price of the money that he receives? It's not the interest rate but the fruits and vegetables that he's selling, just as the price of his fruits and vegetables is the money that his customers must spend in order to buy them. In general, then, the price of money is the goods or services required to obtain it, just as the price of a good or service is the money required to obtain it.
2) The video says that low interest rates encourage borrowing. That's true, but more importantly, low interest rates encourage borrowing for long-term capital projects -- projects that take a relatively long time to complete. Businesses will not embark on such projects unless interest rates are fairly low, because it takes them longer to pay off the loan. The video does touch on that in passing, but does not emphasize it.
|
