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In 2010 few firms were investing in new projects or expanding. Yet, interest rates were extremely...

In 2010 few firms were investing in new projects or expanding. Yet, interest rates were extremely low. Why, with this very low cost of capital would firms not be investing in new projects?

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Answer #1

Low interest rates were kept to encourage the firms make new investments and expand so that new employment opportunities are created. But, it is very important to have the sufficient demand that could encourage the new investments and expansion so that additional supply is created to cater the demand. In 2010, there was lack of demand in the economy and existing capabilities of the firms were more than the required, to produce the supply to meet the existing demand. So, firms were not willing to make investments as demand was not there. It also created a case of liquidity trap where decreasing interest rates could not increase the borrowings in the economy.

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