Question

How do the low-interest rates during this pandemic affect a firm’s decisions to invest in long-term assets?

Answer 1

Low-interest rates during this pandemic will encourage a firm to invest in long-term assets.

This is because low-interest rates will encourage investment spending by businesses. During the current pandemic crisis low-interest rates have resulted in lower borrowing costs for firms. The lower cost of borrowing has encouraged many firms and business entities to take advantage of this and hence invest in long term assets like plants, equipment and machinery. Once the pandemic is over and the economic situation is normalized the firm will be able to reap the benefits of its investments in long-term assets and will be able to produce more, sell more and hence earn more. It should be noted that once the pandemic is over and the economic cycle normalizes then the interest rates will no longer be low and will certainly rise for sure. Once this happens firms will not have an opportunity to benefit from the low cost of borrowing.