Question

PLEASE ANSWER IN DETAILS!

What effect would each of the following events likely have on the level of nominal interest rates?

a. Households dramatically increase their savings rate. (100 Words)

b. Corporations increase their demand for funds following an increase in investment opportunities. (100 Words)

c. The government runs a larger-than-expected budget deficit. (100 Words) d. There is an increase in expected inflation. (100 Words)

Answer 1

A. When the household will dramatically increase their savings rate it will mean that the interest rate in the economy will be going up because when the saving rate will be increasing it will mean that the nominal interest rate in the economy is going up and the households are are trying to increase their savings so it would be leading to more of the interested offering due to which households are placing the money into the banks as they are looking that there is a higher rate of return which is offered by the savings banks and hence it is assumed that it is a regime of higher interest rate in which there is a high interest on savings accounts so households are motivated to keep money in the saving account

B. when the corporations are increasing the demand for the funds following increase in the investment opportunities will mean that there is decrease in the interest rate as the demand for the corporations are going up and it will mean that increasing demand is leading to increasing interest rate and hence there will be lower interest rate in the economy in order to support the demand so that these corporations are able to borrow at a lower interest rate and they are going to maximize most out of their growth opportunities so there is a regime of lower interest rate in which the corporations are borrowing from the bank and investing into the business.

C. when the government is running a larger than expected deficit it will mean that the interest rate is bound to come down because when the government is facing the deficit in the economy it will mean that there will be a lower interest rate in order to counter the lower growth because there is a lower growth scenario due to which the government is facing the deficit and it would be leading to a stimulation of the economy by lowering of the interest rates by the Federal Reserve in order to support the government so it would be a regime of lower interest rate in which the government is encouraging budget deficits

D. when there would be an increase in the expected inflation it will mean that Central Bank of the country is going to increase the interest rate in order to counter the inflation in the economy and it will be reflecting that there is a need for increase in the interested in order to counter the inflation because increase in inflation is a reflection of increase in the demand in the economy and increase in the demand in the economy is a reflection of increase in the monetary flow of the economy so interest rates will be going up in order to navigate the inflation.