It is a well-known fact that high-interest rates make loans more expensive. When interest rates are high, fewer people and businesses can afford to borrow. That lowers the amount of credit available to fund purchases, slowing consumer demand. At the same time, it encourages more people to save because they recerve more on their savings rate. High-interest rates also reduce the capital available to expand businesses, strangling supply. This reduction in liquidity slows the economy and results in decrease in GDP, It is understood that the low-interest rates stimulate all types of real investments and thus economic growth. However, savings rates fall, when savers find they get less interest on their deposits, and thus they might decide to spend more. They might also put their money into slightly riskier but more profitable investments, which drives stock prices. Based on this, it can be claimed that (especially high) interest rates are detrimental to economic growth as well as income distribution up • Critically assess the above-mentioned statement and argument.

It is a well-known fact that high-interest rates make loans more expensive. When interest rates are high, fewer people and businesses can afford to borrow. That lowers the amount of credit available to fund purchases, slowing consumer demand. At the same time, it encourages more people to save because they recerve more on their savings rate. High-interest rates also reduce the capital available to expand businesses, strangling supply. This reduction in liquidity slows the economy and results in decrease in GDP, It is understood that the low-interest rates stimulate all types of real investments and thus economic growth. However, savings rates fall, when savers find they get less interest on their deposits, and thus they might decide to spend more. They might also put their money into slightly riskier but more profitable investments, which drives stock prices. Based on this, it can be claimed that (especially high) interest rates are detrimental to economic growth as well as income distribution up • Critically assess the above-mentioned statement and argument.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter21: Financial Markets, Saving, And Investment

Section: Chapter Questions

Problem 9P

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Similar questions

In the loanable funds market, if firms become more optimistic about future profitability, then the a demand for loanable funds will increase, interest rates will increase, and private sector investment spending will increase. b demand for loanable funds will decrease, interest rates will decrease, and the equilibrium quantity of borrowing will decrease. c supply of loanable funds will increase, interest rates will decrease, and the equilibrium quantity of borrowing will increase. d supply of loanable funds will increase, interest rates will increase, and private sector investment spending will increase.
Suppose you are in charge of the financial departmentof your company and you have to decide whether toborrow short or long term. Checking the news, yourealize that the government is about to engage in amajor infrastructure plan in the near future. Predictwhat will happen to interest rates. Will you advise borrowing short or long term?
Analyze the impacts of the economy entering a time of expansion (i.e. "good times") on the market for loanble funds. (Assume that expectations about the future don't change.) Because of the expansion, equilibrium interest rates will and the equilibrium quantity of loanable funds will O decrease ; rise, fall, or not change (ambiguous effect) O increase ; decrease O increase ; rise, fall, or not change (ambiguous effect) rise, fall, or not change (ambiguous effect) ; increase O rise, fall, or not change (ambiguous effect) ; decrease
Suppose the government borrows $20 million more next year than this year. Answer questions d and ea. Draw and fully label a diagram to illustrate the market for loanable fund to analyzethis policy.b. Does the rate of interest rise or fall? c. What happens to investment? To private savings? To public savings? To nationalsavings? d. How does the elasticity of the supply of loanable funds affect the size of thesechanges? e. How does the elasticity of the demand of loanable funds affect the size of thesechanges?
HOw wil his change the Scenario 2: The government increases deficit spending by $100 Billion dollars to invest in green energy throughout the country. 1.What effect will this have on the demand for loanable funds? 2. What effect will this change have on the interest rate? 3. How will this change the behavior of consumers? Scenario 3: Unemplovment decreases throughoutthe country causing a dramaticincrease in
Manipulate the graph to show what will happen to supply and demand in the market for loanable funds when the government budget deficit increases, changing the equilibrium quantity of loanable funds by 3 percentage points. Ceteris paribus, what is the new interest rate? interest rate: 6 Ceteris paribus, private investment would decrease. not change. increase. % Interest rate (%) 10 9 8 7 6 4 3 2 1 0 0 Supply 6 Demand 2 4 6 8 10 12 14 16 18 20 22 24 26 28 Quantity of loanable funds (% of GDP)
In the Loanable Funds Market Model, ceteris paribus, it typically follows that when the federal government runs a budget deficit, there will be préssure on interest rates and pressure on private investment. This is referred to as Select one: O a. upward; upward; crowding out Ob. upward; downward; crowding out O c. downward; downward; financial intermediation Od. downward; upward; financial intermediation.
Use the analysis for the market for loanable funds diagram to illustrate and explain how thefollowing government policy affect the economy’s saving and investment. Policy 1: Suppose thegovernment changes the tax code, allowing individuals to reduce their taxable income if they savemoney in registered retirement savings plans (RRSPs). Your response should answer the following questions:a. State and explain which loanable funds curve would this policy affect? b. Which way would the loanable funds curve shift? c. What would be the impact on interest rates? Draw the loanable funds diagram to illustrate your answers for a to c.
If there is a surplus of loanable funds, then 1) the quantity demanded is greater than the quantity supplied and the interest rate will rise. 2) the quantity demanded is greater than the quantity supplied and the interest rate will fal. O 3) the quantity supplied is greater than the quantity demanded and the interest rate will rise. 4) the quantity supplied is greater than the quantity demanded and the interest rate will fall.
Interest Rate% 12% 10% 8% 6% 4% 2% 0 5 10 15 20 25 30 35 40 45 50 Supply of Savings Select one: a. The economic dips into a recession and firms see profits fall b. Firms become more optimistic about their expected profits c. An increase in business taxes d. A decrease in household wealth Quantity of loanable funds (billions) Refer to the graph above. Which of the following would cause interest rates to increase? Ti Demand for Borrowing
When Vladimir sells bonds and gets money, his liquidity O A. and interest do not change. B. increases and he gains interest. O C. decreases and he gives up interest. O D. decreases and he gains interest. O E. increases and he gives up interest.
Real interest rate (percent per year) 10 8 6 4 2 0 1 SLF DLF 2 5 6 Loanable funds (trillions of 2009 dollars) 4) Using the figure above, show the effect on the real interest rate and the quantity of loanable funds of an increase in expected profit.