The factors that influence the rate of interest in Country U.

Question

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Answer 1

Question

Chapter 14, Problem 1CQ

To determine

The factors that influence the rate of interest in Country U.

Expert Solution & Answer

Explanation of Solution

Option (a):

When the population that saves more increases, it leads to increase the aggregate saving in an economy. This will increase the availability of money in the economy. This in turn reduces the interest rate.

Option (b):

When the government increases the borrowing in order to finance the budget deficit, the rate of interest will increase. This is because the fiscal expansion leads to a decrease in the availability of money for the private investment, which is termed as crowding out. As a result, the demand for loanable fund increases, which causes an increase in the rate of interest.

Option (c):

The real interest rate is the rate that is adjusted to eliminate the effects of inflation. The real interest rate can be calculated by deducting inflation rate from the money rate of interest.

Nominal interest rate=Real interet rate+Inflation rate

The above equation states that there is a positive relationship between nominal interest rate and inflation, whereas a negative relationship between real interest rate and inflation. Thus, an increase in the inflation rate leads to an increase in the nominal interest rate.

Option (d):

When there is a war, it leads to inflationary situation. The increase in inflation leads to a reduction in the money value, which in turn increases the nominal interest rate.

Option (e):

When the investment opportunities in Continent E increases, the rate of interest will decrease. This is because the investment opportunities leads to a higher demand for money. As a result, the rate of interest increases.

Economics Concept Introduction

Crowding out: Crowding out effect refers to the decrease in the availability of money for private investment due to increase in the fiscal expansion.

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Students have asked these similar questions

For each of the following pairs, which bond would you expect to pay a higher interest rate? Explain! a bond of the U.S. government or a bond of an East European government a bond that repays the principal in year 2015 or a bond that repays the principal in year 2040 a bond from Coca-Cola or a bond from a software company you run in your garage a bond issued by the federal government or a bond issued by New York State 2. Many workers hold large amounts of stock issued by the firms at which they work. Why do you suppose companies encourage this behavior? Why might a person not want to hold stock in the company where he works? 3. Economists in Funlandia, a closed economy, have collected the following information about the economy for a particular year: Y = 10,000; C = 6,000; T = 1,500; G = 1,700. The economists also estimate that the investment function is: I =3,300 –100r where r is the country’s real interest rate, expressed as a percentage. Calculate private saving, public saving,…

Draw a graph of the supply and demand of loanable funds. Then, show how the interest rate will be affected when the following scenarios occur: a. The government implements a program that reduces investment tax credits. b. The government budget deficit is reduced by 30%. (Hint: Does the government still need to borrow?) c. More foreigners are saving their money in U.S. banks.

For each of the following pairs, which bond would you expect to pay a higher interest rate? Explain! a). a bond of the U.S. government or a bond of an East European government b). a bond that repays the principal in year 2015 or a bond that repays the principal in year 2040 c). a bond from Coca-Cola or a bond from a software company you run in your garage d). a bond issued by the federal government or a bond issued by New York State

Answer 2

Question

Chapter 14, Problem 1CQ

To determine

The factors that influence the rate of interest in Country U.

Expert Solution & Answer

Explanation of Solution

Option (a):

When the population that saves more increases, it leads to increase the aggregate saving in an economy. This will increase the availability of money in the economy. This in turn reduces the interest rate.

Option (b):

When the government increases the borrowing in order to finance the budget deficit, the rate of interest will increase. This is because the fiscal expansion leads to a decrease in the availability of money for the private investment, which is termed as crowding out. As a result, the demand for loanable fund increases, which causes an increase in the rate of interest.

Option (c):

The real interest rate is the rate that is adjusted to eliminate the effects of inflation. The real interest rate can be calculated by deducting inflation rate from the money rate of interest.

Nominal interest rate=Real interet rate+Inflation rate

The above equation states that there is a positive relationship between nominal interest rate and inflation, whereas a negative relationship between real interest rate and inflation. Thus, an increase in the inflation rate leads to an increase in the nominal interest rate.

Option (d):

When there is a war, it leads to inflationary situation. The increase in inflation leads to a reduction in the money value, which in turn increases the nominal interest rate.

Option (e):

When the investment opportunities in Continent E increases, the rate of interest will decrease. This is because the investment opportunities leads to a higher demand for money. As a result, the rate of interest increases.

Economics Concept Introduction

Crowding out: Crowding out effect refers to the decrease in the availability of money for private investment due to increase in the fiscal expansion.

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Answer 3

Question

Chapter 14, Problem 1CQ

To determine

The factors that influence the rate of interest in Country U.

Expert Solution & Answer

Explanation of Solution

Option (a):

When the population that saves more increases, it leads to increase the aggregate saving in an economy. This will increase the availability of money in the economy. This in turn reduces the interest rate.

Option (b):

When the government increases the borrowing in order to finance the budget deficit, the rate of interest will increase. This is because the fiscal expansion leads to a decrease in the availability of money for the private investment, which is termed as crowding out. As a result, the demand for loanable fund increases, which causes an increase in the rate of interest.

Option (c):

The real interest rate is the rate that is adjusted to eliminate the effects of inflation. The real interest rate can be calculated by deducting inflation rate from the money rate of interest.

Nominal interest rate=Real interet rate+Inflation rate

The above equation states that there is a positive relationship between nominal interest rate and inflation, whereas a negative relationship between real interest rate and inflation. Thus, an increase in the inflation rate leads to an increase in the nominal interest rate.

Option (d):

When there is a war, it leads to inflationary situation. The increase in inflation leads to a reduction in the money value, which in turn increases the nominal interest rate.

Option (e):

When the investment opportunities in Continent E increases, the rate of interest will decrease. This is because the investment opportunities leads to a higher demand for money. As a result, the rate of interest increases.

Economics Concept Introduction

Crowding out: Crowding out effect refers to the decrease in the availability of money for private investment due to increase in the fiscal expansion.

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Answer 4

Question

Chapter 14, Problem 1CQ

To determine

The factors that influence the rate of interest in Country U.

Expert Solution & Answer

Explanation of Solution

Option (a):

When the population that saves more increases, it leads to increase the aggregate saving in an economy. This will increase the availability of money in the economy. This in turn reduces the interest rate.

Option (b):

When the government increases the borrowing in order to finance the budget deficit, the rate of interest will increase. This is because the fiscal expansion leads to a decrease in the availability of money for the private investment, which is termed as crowding out. As a result, the demand for loanable fund increases, which causes an increase in the rate of interest.

Option (c):

The real interest rate is the rate that is adjusted to eliminate the effects of inflation. The real interest rate can be calculated by deducting inflation rate from the money rate of interest.

Nominal interest rate=Real interet rate+Inflation rate

The above equation states that there is a positive relationship between nominal interest rate and inflation, whereas a negative relationship between real interest rate and inflation. Thus, an increase in the inflation rate leads to an increase in the nominal interest rate.

Option (d):

When there is a war, it leads to inflationary situation. The increase in inflation leads to a reduction in the money value, which in turn increases the nominal interest rate.

Option (e):

When the investment opportunities in Continent E increases, the rate of interest will decrease. This is because the investment opportunities leads to a higher demand for money. As a result, the rate of interest increases.

Economics Concept Introduction

Crowding out: Crowding out effect refers to the decrease in the availability of money for private investment due to increase in the fiscal expansion.

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Answer 5

Chapter 14, Problem 1CQ

To determine

The factors that influence the rate of interest in Country U.

Expert Solution & Answer

Explanation of Solution

Option (a):

When the population that saves more increases, it leads to increase the aggregate saving in an economy. This will increase the availability of money in the economy. This in turn reduces the interest rate.

Option (b):

When the government increases the borrowing in order to finance the budget deficit, the rate of interest will increase. This is because the fiscal expansion leads to a decrease in the availability of money for the private investment, which is termed as crowding out. As a result, the demand for loanable fund increases, which causes an increase in the rate of interest.

Option (c):

The real interest rate is the rate that is adjusted to eliminate the effects of inflation. The real interest rate can be calculated by deducting inflation rate from the money rate of interest.

Nominal interest rate=Real interet rate+Inflation rate

The above equation states that there is a positive relationship between nominal interest rate and inflation, whereas a negative relationship between real interest rate and inflation. Thus, an increase in the inflation rate leads to an increase in the nominal interest rate.

Option (d):

When there is a war, it leads to inflationary situation. The increase in inflation leads to a reduction in the money value, which in turn increases the nominal interest rate.

Option (e):

When the investment opportunities in Continent E increases, the rate of interest will decrease. This is because the investment opportunities leads to a higher demand for money. As a result, the rate of interest increases.

Economics Concept Introduction

Crowding out: Crowding out effect refers to the decrease in the availability of money for private investment due to increase in the fiscal expansion.

Answer 6

Chapter 14, Problem 1CQ

To determine

The factors that influence the rate of interest in Country U.

Expert Solution & Answer

Explanation of Solution

Option (a):

When the population that saves more increases, it leads to increase the aggregate saving in an economy. This will increase the availability of money in the economy. This in turn reduces the interest rate.

Option (b):

When the government increases the borrowing in order to finance the budget deficit, the rate of interest will increase. This is because the fiscal expansion leads to a decrease in the availability of money for the private investment, which is termed as crowding out. As a result, the demand for loanable fund increases, which causes an increase in the rate of interest.

Option (c):

The real interest rate is the rate that is adjusted to eliminate the effects of inflation. The real interest rate can be calculated by deducting inflation rate from the money rate of interest.

Nominal interest rate=Real interet rate+Inflation rate

The above equation states that there is a positive relationship between nominal interest rate and inflation, whereas a negative relationship between real interest rate and inflation. Thus, an increase in the inflation rate leads to an increase in the nominal interest rate.

Option (d):

When there is a war, it leads to inflationary situation. The increase in inflation leads to a reduction in the money value, which in turn increases the nominal interest rate.

Option (e):

When the investment opportunities in Continent E increases, the rate of interest will decrease. This is because the investment opportunities leads to a higher demand for money. As a result, the rate of interest increases.

Economics Concept Introduction

Crowding out: Crowding out effect refers to the decrease in the availability of money for private investment due to increase in the fiscal expansion.

Answer 7

Chapter 14, Problem 1CQ

To determine

The factors that influence the rate of interest in Country U.

Answer 8

Expert Solution & Answer

Explanation of Solution

Option (a):

When the population that saves more increases, it leads to increase the aggregate saving in an economy. This will increase the availability of money in the economy. This in turn reduces the interest rate.

Option (b):

When the government increases the borrowing in order to finance the budget deficit, the rate of interest will increase. This is because the fiscal expansion leads to a decrease in the availability of money for the private investment, which is termed as crowding out. As a result, the demand for loanable fund increases, which causes an increase in the rate of interest.

Option (c):

The real interest rate is the rate that is adjusted to eliminate the effects of inflation. The real interest rate can be calculated by deducting inflation rate from the money rate of interest.

Nominal interest rate=Real interet rate+Inflation rate

The above equation states that there is a positive relationship between nominal interest rate and inflation, whereas a negative relationship between real interest rate and inflation. Thus, an increase in the inflation rate leads to an increase in the nominal interest rate.

Option (d):

When there is a war, it leads to inflationary situation. The increase in inflation leads to a reduction in the money value, which in turn increases the nominal interest rate.

Option (e):

When the investment opportunities in Continent E increases, the rate of interest will decrease. This is because the investment opportunities leads to a higher demand for money. As a result, the rate of interest increases.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Economics Concept Introduction

Crowding out: Crowding out effect refers to the decrease in the availability of money for private investment due to increase in the fiscal expansion.

Answer 12

Ch. 14 - Prob. 1CQ Ch. 14 - Prob. 2CQ Ch. 14 - Prob. 3CQ Ch. 14 - Prob. 4CQ Ch. 14 - Prob. 5CQ Ch. 14 - Prob. 6CQ Ch. 14 - Prob. 7CQ Ch. 14 - Prob. 8CQ Ch. 14 - Prob. 9CQ Ch. 14 - Prob. 10CQ

The factors that influence the rate of interest in Country U.

The factors that influence the rate of interest in Country U.

Explanation of Solution

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