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.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: Savings,investment And The Financial System

Section: Chapter Questions

Problem 6PA

See similar textbooks

Similar questions

There is a recent issuanceof asignificant number of treasury sharesat a higher interest rate. How wouldthis affect businesses: A. Individuals and businesses are encouraged to save, hence businesses will expect lower demand and lower prices.B. Individuals and businesses are encouraged to save, hence businesses will expect higher demand and lower prices.C. Individuals and businesses are encouraged to spend, hence businesses will expect lower demand and lower prices.D. Individuals and businesses are encouraged to spend, hence businesses will expect higher demand and higher prices.
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?
7. The Federal Reserve has raised the Federal Funds rate by 3.75 percent within the past year. Ifa bank had capital of 10 percent when the Fed began raising rates and has no loans at risk ofdefault, under what circumstances will its capital position be compromised? Please be specific.8. How do rising interest rates affect the size of real estate loans that lenders will advance?Again, be specific.9. Mortgage rates have risen by about 4 percent over the past year. Does that mean that theacceptable minimum appreciation rate for looking at owner housing relative to renting hasrisen by 4 percent? Why or why not? (Hint: think about our analysis of the buy-rent decision).10. You are evaluating a CMBS. Beyond the standard metrics (i.e., LTV, DCI, etc.), name twothings to consider in evaluating the security.
As and example of a possible investment restriction, an insurer mah only be allowed to invest up to 20 percent of its assets in common stock. What penalty is imposed upon the insurer that invests 30 percent of available assets in common stock?A. The additional 10 percent must be disposed of by year endB. The state regulators would impose a 10 percent fine on the insurer.C. The additional 10 percent would be a nonadmitted asset.D. The additional 10 percent would only be listed at cost.
Table shows the amount of savings and borrowing in a market, measured in millions of dollars, at various interest rates. What is the equilibrium interest rate and quantity in the capital financial market? Now, imagine the supply curve shifts so that there will be $50 million less supplied at every interest rate. Calculate the current and the new equilibrium interest rate and quantity, and explain the situation: the reasons of decrease of supply and what new equilibrium mean. Interest rate Qs Qd 5 200 470 6 270 320 7 320 320 8 350 300 9 400 200 10 500 100
5 2.Asymmetric Information. Now let’s examine the impact of asymmetric information on thecreditmarket equilibrium. Specifically, in this question we assume that Anderson is not able toobserveor enforce the project that the borrower chooses. As a result, the loan contract can onlyspecifythe interest rate (not the project). Everything else remains as in problem 1.a.What type of asymmetric information problem does Anderson face? Write a shortexplanation justifying your answer.
The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, andtwo years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of£) as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantitydemanded/supplied at this interest rate? What happens to the demand/supply of the bond asthe interest rate increases? Explain why. c) What is the equilibrium interest rate?
The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, andtwo years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of£) as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantitydemanded/supplied at this interest rate? What happens to the demand/supply of the bond asthe interest rate increases? Explain why. c) What is the equilibrium interest rate? d) Suppose that the bond trades at premium. Is there excess demand or supply? Explain.e) There is a business cycle expansion, so both supply and demand shifts. After the shift, thenew demand curve is given by: D = 4000 + X − 2P, whereas the new supply curve is S =2P + 200. For which values of X will the interest increase/decrease? Which values of X arein line with empirical data?
When company executives buy and sell stock basedon private information they obtain as part of theirjobs, they arc engaged in insider lmding.:t Give an example of inside information that mi~;htbe useful for buying or selling stock.h. "rho,::,.. who trnriP "'tnrh hMM nn in"irlPinformation usuaUy cam very high rates ofreturn. Docs this fact violate the efficient marketshypothesis?c. Insider trading is illegal. Why do you supposethat is?
Does the old agent consume more with a growing money stock and transfers than in the equilibrium without money stock growth and transfers?In words, explain the intuition of this result. Pls no plagiarism
LIDLCII Real Interest Rate 8% re 6% USA * Supply 8% 6% 3% Not enough information Demand Q of LF Suppose that after the change illustrated, people in China begin saving more money in American assets. Which of the following is a reasonable interest rate that would ensue from this new change?
(a) Suppose the price level in an economy rises while the money wage rate remains constant. What happens to the quantity of real GDP supplied. How will this affect the aggregate supply or aggregate demand curve? What if the potential GDP increases? Which aggregate curve is affected and how? (b) Real GDP Consumption Planned Investment Government Purchases Net Exports $1,000 $1,000 $100 $150 -$50 2,000 1,900 100 150 -50 3,000 2,800 100 150 -50 4,000 3,700 100 150 -50 From the table data provided, answer the following questions. The numbers in the table are in billions of dollars. Show all calculations. a. What is the equilibrium level of real GDP? b. What is the Marginal Propensity to Consume? c. What is the multiplier value in this economy? d. If potential GDP is $4,000 billion, is the economy at full employment? If not, what is the condition of the economy? e. If the economy is…