Will a decrease in oil prices have an IMMEDIATE IMPACT on the U.S. real interest rate?...

Will a decrease in oil prices have an IMMEDIATE IMPACT on the U.S. real interest rate? Why or why not?

Solutions

Expert Solution

Generally reduced oil prices are associated with a lower real interest rate. This is because when oil prices are reduced the countries that export oil experience a reduction in their accumulated revenues from oil. The importing countries experience reduction in their cost of production because oil is considered to be a major raw material. With the decline in production cost aggregate supply of production is increased and there is a reduced general price level. With deflationary pressures and stabilized nominal interest rates the real interest rate rises. As far as the real interest rate in the United States it is concerned, it is expected to increase with a decrease in the oil prices but such transition may not occur immediately because there is a gestation period from buying oil increasing production and supplying the final goods in the market. Therefore there can be no immediate impact on the real interest rate.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

If real U.S. interest rate is higher than real European interest rate, the demand for U.S....

If real U.S. interest rate is higher than real European interest rate, the demand for U.S. Dollar would likely ____, and the supply of Euros to be exchanged for dollars would likely ____, other factors held constant. 1 point a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease

What impact might a decrease in the U.S. federal budget deficit have on interest rates and...

What impact might a decrease in the U.S. federal budget deficit have on interest rates and exchange rates in the market for the U.S. dollar? (Assume the exchange rate is stated in terms of foreign currency per U.S. dollar.) A. Interest rates decrease and exchange rates increase. B. Interest rates increase and exchange rates decrease. C. Interest rates and exchange rates decrease. D. Interest rates and exchange rates increase.

Suppose that real interest rates decrease across Europe. This development will (Increase/Decrease) U.S. net capital outflow...

Suppose that real interest rates decrease across Europe. This development will (Increase/Decrease) U.S. net capital outflow at all U.S. real interest rates, which in turn will cause the (Demand for/Supply of) loanable funds to (Increase/Decrease) because net capital outflow is a component of the relevant curve in the loanable funds market.

Which of the following is TRUE concerning the impact of interest rate changes on stock prices?...

Which of the following is TRUE concerning the impact of interest rate changes on stock prices? Group of answer choices As interest rates rise, stock prices rise because companies earn more profits on invested funds. As interest rates rise, stock prices generally are unaffected because companies earn more profits on invested funds but pay lower interest costs on borrowed funds. As interest rates fall, stock prices fall because companies earn lower returns on invested funds. As interest rates fall, stock...

An oil price _______ is a sudden increase or decrease in the nominal or real price...

An oil price _______ is a sudden increase or decrease in the nominal or real price of oil. This is an example of a ________ -side shock. Fill in the blanks

Which of the following policy changes would decrease the real interest rate? A A tax cut...

Which of the following policy changes would decrease the real interest rate? A A tax cut on interest income B A policy that decreases government consumption expenditures C A reduction in social security benefits D All of the above correct answer is D need the explianation

Question