How is it possible for investment spending to increase even in a period in which the real interest rate rises? Explain three reasons for this
What will be an ideal response?
Answer:-
(a) The supply of loanable funds is upsloping because savers will make more funds available at higher interest rates than lower interest.
(b) The demand for loanable funds is downsloping because there are few investment and R&D projects that yield a high rate of return and many more that will yield a lower rate of return.
(c) The equilibrium interest rate is determined where the interest rate (cost of borrowing the funds) is equal to the expected rate of return (the expected benefit from borrowing the funds and engaging in the investment or R&D project). The supply of loanable funds may change because of a change in households' attitudes about saving (tax policies, macroeconomic conditions) or changes in Federal Reserve policies relative to the money supply. The demand for loanable funds could change as a result a change in technology or a change in the demand for the final product. If there is either a change in the supply of or demand for loanable funds, the interest rate will change.
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The law of demand implies that the demand curve
A) has a negative slope. B) has a positive slope. C) shifts to the right when the price of a good increases. D) shifts to the left when the price of a good decreases.
Suppose that the price of an ounce of gold is 120 pesos in Mexico and 2,400 yen in Japan. Then the Japanese yen is worth two hundred times the value of a Mexican peso
a. True b. False Indicate whether the statement is true or false
The predominant condition that encourages governments to place price floors on markets is
a. the need for consumers to buy products at reasonable prices b. a war situation in which excess demands occur resulting in price increases c. a substantial increase in income, which shifts the demand curve to the left d. a series of substantial crop failures that shift the supply curve of food to the left e. technological changes that shift the supply curve to the right
Which of the following is correct? When the actual amount supplied exceeds the actual amount demanded, then:
a. Inventories rise, unemployment tends to rise, and prices tend to fall. b. Inventories rise, unemployment tends to fall, and prices tend to rise. c. Inventories fall, unemployment tends to rise, and prices tend to rise. d. It is impossible for these two to be unequal. e. The nation falls into an economic recession.