An animal farmer has 100 cows and each year there are 10 new born calfs (buzagı). That is, his business's real growth is 10%. The (nominal) interest rate is 15% while there is 10% inflation. What must happen in the FM so that the farmer decides to sell all cows and supply the revenue (funds) to the financial system. (explain briefly)
Answer - In the financial market , the nominal interest rate must be atleast equal to or above 20 % ,i.e it must rise more so that the difference between the interest rate and inflation is more than 10 %. When this happens , the farmer will be more benefitted from investing and will supply the cows as after adjusting the rate of inflation, his return on investment will be more than return on rearing cows. For this to happen , prices in FM must fall , demand must rise in order to bring rise in interest rates .
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