Question

Let's suppose we are living in a country in which opportunities of making profits, and entreprenurial activity are main determinants of investment demand. In this scenario, how is parameter b? How this affect the elasticity of investment with respect to changes in interest rate? How a cut in the benchmark interest rate could affect the quantity of investment in the economy? Explain thoroughly, use models, and graphs.

Answer 1

Sol: Speculative trading are keen interest of suh entrepreneur. When find some market opportunities, ready to invest in such plans. Change in interest rates affect the level of investment by entrepreneur. interest rates are the main factors that affect the level of investment by entrepreneur, if higher the interest rates , less the entrepreneur will be intrested and less will be the investment and vice versa.

Entreprenurial activity leads to generation of values and helps in the growth and development of the country. invetsment made by the entrepreneur depends upon effective interest rates.Higher interest rates increases the cost of procuring the fund, reduces the profit of entrepreneur and increase the risk factor also.

IS-LM curve of hicks -hansen shows the relation between interest rates and asset market , that is "how loanable funds affect the market investment by enterpreneur.

reduction in the rate of interest increases the money supply and demand for money also increases. this lead to more level of investment and vice versa.