Question

1) How does a changing interest rate affect the value of money over time?

2) In the Ginny's restaurant case, how do we leverage potential future cash flows to attain funds today?

3) How would our decisions change in the Ginny's restaurant case based on our expectation of future interest rates? What would we do if we expect the Fed to continue to increase rates over the next year-- does it change our decisions?

Answer 1

1. Changing interest rate affect the value of the money because the changing interest rate has a capability of of increasing the value of the money and decreasing the value of the money .

When the interest rate is higher that means the people are more inclined to save and not spend, because the value of money has gone lower as the purchasing power of money has decreased, and when the interest rate is lower that means people are more willing to spend, as the purchasing power of money has gone up as the prices of the commodities will be down so people are more inclined to purchase and spend and their investment and savings capacity will go down.

So in a regime of rising interest rate, people tend to save more and invest, and in a regime of falling interest rate, people tend to spend more and save less.