Suppose that the government decided to increase interest rates in order to encourage saving. Would this likely lead to an increase in investment and higher future economic growth rates? Explain.
What will be an ideal response?
No. The increase in interest rates might encourage more saving (less present consumption) but not more investment. The opportunity cost of the funds would rise, and make it more difficult to pay back borrowed money than if interest rates were lower. Most likely, investment would decrease instead of increase.
You might also like to view...
You go to the movieplex where movies ordinarily cost $9 . You are intending to see a movie for which you have a $3 off coupon good for only that movie at that time. However, when you get there you see a friend who asks if you would rather see a new release. Both movies start and end at the same time. If you decide to see the new release with your friend, what is your opportunity cost?
a. the amount you value the first movie + $3 b. the amount you value the first movie + $9 c. $3 d. $9
If the demand of U.S. dollars drops sharply
A. the dollar will depreciate in value. B. foreigners holding U.S. assets will suffer tremendous losses. C. Americans will have to pay a lot more for imported goods. D. All of the choices are true.