"Higher interest rates lower equilibrium real GDP and thus slow the rate of economic growth." Critique...

"Higher interest rates lower equilibrium real GDP and thus slow the rate of economic growth." Critique (and explain the underlying basis for) this quote noting whether it is true all of the time or only some of the time.

Expert Solution

The underlined link of the above quotation is as follows:

Higher interest rates leads to a decrease in the investment spending in the economy. This is because as the interest rates become higher the cost of borrowing to invest increases. This discourages investment spending in the economy.

Decrease in investment spending due to higher interest rates leads to a decrease in the aggregate demand as well. Decrease in aggregate demand leads to a decrease in level of output in the economy and Thus a Decrease in the equilibrium real GDP. The rate of economic growth decelerates.

Hence, it is true that higher interest rates lower equilibrium real GDP and thus, slow the rate of economic growth.

However it should be noted that it is not true all the time. One situation which defies this argument is when the investment spending is completely insensitive to the changes in the rate of interest. In this situation higher interest rate would not lead to a decrease in the investment spending as the investment spending is insensitive to the changes in interest rates.

Hence, the above given quotation is not true for all the time.

Rahul Sunny answered 2 years ago

How did lower interest rates help economic growth?

According to economic growth theory, the level of the GDP and the rate of the real...

According to economic growth theory, the level of the GDP and the rate of the real GDP growth rate have different economic implications about the economic well-being of a country. If you are given the options, would you rather live in a nation with a high level of GDP and a low growth rate or in a nation with a low level of GDP and a high growth rate? Why? Economists consider education as an investment that has both private...

Accessing the Bureau of Economic Analysis Website Study real GDP growth rates and their components for...

Accessing the Bureau of Economic Analysis Website Study real GDP growth rates and their components for the four most recent quarters and complete the following: Identify and explain the components that comprise GDP and their relative contributions to GDP. Describe the recent rate of real GDP growth. Identify and analyze the factors that have driven growth (or the lack of growth) in real GDP. Identify any recent events or changes that have caused an increase in GDP but not a...

1-In the long run, what is the theoretical relationship between the rate of growth in real GDP and the real rate of interest?

1-In the long run, what is the theoretical relationship between the rate of growth in real GDP and the real rate of interest? A) Over the long run, rates of growth in real GDP and the real interest rate should be equal. B)There is little correlation between rates of growth in real GDP and the real interest rate. C)Rates of growth in real GDP and the real interest rate have both historically been approximately 5% in the United States....

1-Inflation, slow economic growth, and volatile interest rates are economic outcomes reflected in which of the following components of a security's return?

1-Inflation, slow economic growth, and volatile interest rates are economic outcomes reflected in which of the following components of a security's return? A)Systematic risk B)Unsystematic risk C)Diversifiable risk D)Company-specific risk 2-What is an asset's expected rate of return if the current risk-free rate is 5%, the stock has a beta of 1.4, and the quoted market rate is 9%? A)10.6% B)5.6% C)0.11% D)0.05% 3-As investors become more confident about future economic prospects, the SML: A)Shifts downward but remains parallel...

Plot the level of real GDP (FRED code: GDPC1). Then plot the rate of economic growth...

Plot the level of real GDP (FRED code: GDPC1). Then plot the rate of economic growth as the percent change from a year ago of this index. Describe how real GDP behaves in recessions, which are denoted in the FRED graph by vertical shaded bars.

The Fed sets higher interest rate at each price level. Will Inflation and Real GDP increase...

The Fed sets higher interest rate at each price level. Will Inflation and Real GDP increase or decrease? Provide Diagram.

Create new series with quarterly money growth rates, inflation rates, velocity growth rates, and real GDP...

Create new series with quarterly money growth rates, inflation rates, velocity growth rates, and real GDP growth rates. Note: The quarterly growth rate of a variable x is the growth rate between two consecutive quarters. STATISTICS CANADA FED. RESERVE BANK OF ST.LOIUS DATABASE v62295562 NOMINAL GDP GDP inplicit price deflator M3 Canada Quarterly v62295562 CANGDPDEFQISMEI MABMM301CAQ189S Q1 1981 354784 42.6981111563270 204311333333.333000 Q2 1981 366788 43.6610414619373 207984000000.000000 Q3 1981 371560 44.6289982488560 216848000000.000000 Q4 1981 375352 45.2908438640580 218082333333.333000 Q1 1982 381676 46.6083169696692...

Suppose that the nominal interest rate is 4.2%, the real interest rate is 2.8%, real GDP...

Suppose that the nominal interest rate is 4.2%, the real interest rate is 2.8%, real GDP grows at 1%, and this year's money supply is $11.438B. To the nearest million, the size of next year's money supply will be $________B.

“Larger hospitals in South Florida display higher readmission rates and thus lower quality of care compared...

“Larger hospitals in South Florida display higher readmission rates and thus lower quality of care compared to smaller hospitals.” A). Identify the implied dependent and independent variables. B). Does the headline demonstrate a positive or negative correlation between the two? C). Is there a plausible mechanism (confounding factor) through which we could explain why the independent variable has a causal impact on the outcome? D). Now try to think of reasons why this could be a spurious relationship instead and...

Question