Question

Ceterus paribus, how would an overall increase in interest rates affect a nations' investment levels? Explain...

Ceterus paribus, how would an overall increase in interest rates affect a nations' investment levels? Explain why this is the case. Could this result further have an impact on productivity and GDP? Why, or why not? Explain all responses.

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Yes, an overall increase in interest rates affect the nations investment levels because investment is the function of interest rate i.e I(r). It shares an inverse relation with interest rate that is if interest rate increases the investment falls. At higher interest rate, the cost of borrowing becomes expensive not only this the returns must be higher for investors to gain profit.

The marginal efficiency of capital states the return to investment. So as interest rate rises from r1 to r0, the investment decreases from I1 to I0.

Yes, this further reduces the GDP. Due to a decrease in investment, the Investment-Saving (IS) decreases towards left. Hence as we can see from the diagram below, the output shifts leftwards from Y0 to Y1.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
How does an increase in interest rates generally impact overall business? Why is this important when...
How does an increase in interest rates generally impact overall business? Why is this important when attempting to understand leverage?
How would the following events affect bond prices and interest rates in an economy? Please explain...
How would the following events affect bond prices and interest rates in an economy? Please explain using a well-labeled graph for each. a. increase in government borrowing How would the following events affect bond prices and interest rates in an economy? Please explain using a well-labeled graph for each. a. increase in government borrowing
Explain why an increase in the money supply can affect interest rates in different ways. When...
Explain why an increase in the money supply can affect interest rates in different ways. When answering this question, describe the potential impact of the supply and demand for loanable funds.
What effect would government deficit spending have on interest rates? Explain. This change in interest rates...
What effect would government deficit spending have on interest rates? Explain. This change in interest rates caused by the government deficit spending would have a long run effect on investment spending. What effect would that be and why?
Explain how the Federal Reserve’s lowering of interest rates affects the following variables in the short...
Explain how the Federal Reserve’s lowering of interest rates affects the following variables in the short run: household consumption, business investment, real GDP, and the price level. Insert or attach a well-labeled Aggregate Demand/Aggregate Supply graph that would illustrate the effect of a cut in interest rates. What is one macroeconomic problem that could cause the Federal Reserve to become aggressive in raising interest rates? Explain. Describe one issue that could cause the Fed to lower rates? Define the “federal...
1. How does an increase in interest rates affect the present value of a future payment?...
1. How does an increase in interest rates affect the present value of a future payment? 2. How does an increase in the size of a future payment affect the present value of a future payment? 3. Two payments of $1,000 are to be made. One of them will be paid one year from today and the other will be paid two years from today. Which has the greater present value? Why?
How would you expect a large decrease in aggregate demand (the Coronavirus demand shock) to affect...
How would you expect a large decrease in aggregate demand (the Coronavirus demand shock) to affect real GDP in the price level? Explain how and why the spread of the Coronavirus is likely to affect consumer and business investment spending and how it will affect aggregate demand? Be specific. aggregate supply curves are blank for low levels of output, and blank for higher levels of output.
The Federal Reserve has signaled that they intend to increase interest rates three times during 2018....
The Federal Reserve has signaled that they intend to increase interest rates three times during 2018. How will this affect the economy? Check out this video from The New York Times. (http://nyti.ms/1YfSbXA). What affect could the interest rate hike potentially have on unemployment? Why?
Explain why an increase in U.S. interest rates would cause the currencies of some emerging economy...
Explain why an increase in U.S. interest rates would cause the currencies of some emerging economy countries to depreciate.
Explain how each of the following events in questions 2 and 3 would affect the aggregate...
Explain how each of the following events in questions 2 and 3 would affect the aggregate demand curve. No graph required 2. Domestic prices decrease, which decreases interest rates. – Word count 100 3. Lower levels of investment by businesses. – Word count 100 PLEASE MAKE THE ANSWER MORE CLEARLY AND HIGH QUALITY. PLEASE DON'T COPY AND PASTE THE ANSWERS WHICH HAVE GIVEN TO THE SAME QUESTION WHICH HAVE POSTED BY OTHERS. GIVE A DIFFERENT BUT ACCURATE ANSWER
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT