The impact of increasing real interest rate when others are kept constant.
Answer to Problem 1CQQ
Option 'c' is correct.
Explanation of Solution
The foreign exchange market is the place of market where the participants are able to buy and sell different foreign currencies with exchange to the domestic currency. Here, the lonable fund interest rate theory applies. The lonable fund includes all the forms of credit of the economy which includes the loans, bonds, and the savings deposits.
Option (c):
When the real interest rate in the economy increases while all other variables are kept constant in the economy, the incentive to save more will increase in the economy. This is because when the interest rates are higher, the interest earned from the savings will be higher. Since the investment and the rate of interest are inversely related, the increase in the real interest rate will reduce the domestic investment of the economy. The higher real interest rate will attract the capital from around the world and thus the capital outflow will also decline. So, option 'c' is correct.
Option (a):
When the real interest rate is higher, it will fetch higher earnings to those who saves more. As a result of this, the private savings of the economy will increase and since the national savings are the summation of the private savings and the government savings, the national savings will increase. Since the investment and the rate of interest are inversely related, the increase in the real interest rate will reduce the domestic investment of the economy. Since option explains that the national savings will decline, option 'a' is incorrect.
Option (b):
When the real interest rate is higher, it will fetch higher earnings to those who save more. As a result of this, the private savings of the economy will increase and since the national savings are the summation of the private savings and the government savings, the national savings will increase. The higher real interest rate will attract the capital from around the world, and thus the capital outflow will also decline. Here also, the option explains that the national savings of the economy will decline, which is incorrect. So, option 'b' is incorrect.
Option (d):
The national savings will increase when the real interest rate of the economy is increased because the higher interest rate will provide higher returns to those who save. So, people will save more to earn more in interest. Since the national savings is the summation of the private and the government savings, it will also increase. So, the option explaining the national savings would decline is incorrect. So, option 'd' is incorrect.
Concept introduction:
Real interest rate: The real interest rate of the economy is determined by the interaction of the demand for lonable funds and the supply of lonable funds in the lonable fund market.
Want to see more full solutions like this?
Chapter 14 Solutions
Bundle: Brief Principles Of Macroeconomics, Loose-leaf Version, 8th + Aplia, 1 Term Printed Access Card
- If a country is running a government budget surplus, why is (T - G) on the left side of the saving-investment identity?arrow_forwardwhat is the importance of Foreign direct investment (FDI) to an agriculture-producing country what are some of the macroenvironmental factors that can affect the lucrativeness of the an agriculture-producing country to foreign investors what are some challenges that investors face in doing business in an agriculture-producing country what are some possible strategies that can be used to make an agriculture-producing country attractive to foreign investors.arrow_forward(b) Discuss how changes in local real interest rates and foreign interest rates impact the decision to carry out investment by (i) foreigners and (ii) locals.arrow_forward
- You are given the following information about an economy: Gross private domestic investment = 40 Government purchases of goods and services = 30 Gross national product (GNP) = 200 Current account balance = -20 Taxes = 60 Government transfer payments to the domestic private sector = 25 Interest payments from the government to the domesticprivate sector = 15 (Assume all interest payments by the government go to domestic households.) Factor income received from rest of world = 7 Factor payments made to rest of world = 9 Find the following, assuming that government investment is zero: a. Consumption, Net exports,GDP and Net factor payments from abroad b. Private saving, Government saving and National savingarrow_forwardQuestion 1:In Ghana, the capital share of GDP is about 40 percent, the average growth in output is about2 percent per year, the depreciation rate is about 3 percent per year, and the capital–output ratiois about 1.5. Suppose that the production function is Cobb–Douglas and that Ghana has beenin a steady state.a. What must the saving rate be in the initial steady state? [Hint: Use the steady-staterelationship, sy = (δ + n + g)k.]b. What is the marginal product of capital in the initial steady state?c. Suppose that public policy alters the saving rate so that the economy reaches the GoldenRule level of capital. What will the marginal product of capital be at the Golden Rule steadystate? Compare the marginal product at the Golden Rule steady state to the marginal productin the initial steady state. Explain.d. What will the capital–output ratio be at the Golden Rule steady state? (Hint: For the Cobb–Douglas production function, the capital–output ratio is related to the marginal product…arrow_forwardExplain the difference between foreign direct investment (FDI) and foreign portfolio investment (FPI)? Explain which one is more useful to accelerate economic growth of home country.arrow_forward
- In an open economy, if the level of net exports rises, it must be the case thata) there is an increase in saving.b) there is an increase in investment.c) the value of saving less investment must fall.d) none of the above. Why the correct answer is D?arrow_forwardIn a closed economy, if Y and T remained the same, but G rose, and C fell but by less than the rise in G, what would happen to public and national saving? a. public and national saving would rise b. public saving would fall and national saving would rise c. public saving would rise and national saving would fall d. public and national saving would fallarrow_forwardThe country of Freedonia has a GDP of $4000, consumption of $1500, and government purchases of $900. What does this situation imply?Question 1 options:Investment is equal to $1600.Investment plus net capital outflow is equal to $1600.Investment plus net exports is equal to $2400.Saving is equal to $2400. Please give me correct answer with calculation and full explanation otherwise i give multiple downvote Note:- Please avoid using ChatGPT and refrain from providing handwritten solutions; otherwise, I will definitely give a downvote. Also, be mindful of plagiarism. Answer completely and accurate answer. Rest assured, you will receive an upvote if the answer is accurate.arrow_forward
- Brief Principles of Macroeconomics (MindTap Cours...EconomicsISBN:9781337091985Author:N. Gregory MankiwPublisher:Cengage LearningPrinciples of Macroeconomics (MindTap Course List)EconomicsISBN:9781285165912Author:N. Gregory MankiwPublisher:Cengage LearningPrinciples of Macroeconomics (MindTap Course List)EconomicsISBN:9781305971509Author:N. Gregory MankiwPublisher:Cengage Learning
- Principles of Economics 2eEconomicsISBN:9781947172364Author:Steven A. Greenlaw; David ShapiroPublisher:OpenStax