Cash Flow

Cash Flow is a Channel in the Transmission Mechanism referring to how changes in interest rates affect the Disposible Cash / Liquidity of both Households / Firms, when it flows through the economy it affects Aggregate Demand through Cosnumption and Investment.

How Interest Rates affect Cash Flow §

When Interest Rate rise;

• The Interest Payments for borrowers rise
  • Thus they can’t spend elsewhere.
• Savers Interest Receipts rise
  • Meaning they receive more cash for other spending

These work in opposite directions, generally though Lower Interest Rates result in greater spending in the economy. The Majority of Businesses are Borrowers, some households are borrowers, others are savers.