Question

a. Your friend is asking you for a loan of $1,000. You do not plan on charging your friend any interest. Is it better to lend him money when interest rates are at 1% or at 5%?

b. You have $10,000 in your savings account, and your college tuition for the year will be $10,000. Interest rates are 10%. Does it matter if you choose to borrow $10,000 from the bank to pay for your tuition versus using all of your savings? Point out why this may be unrealistic.

c. If the Federal Reserve lowers interest rates, explain why companies are more likely to borrow money. Explain what effects this may have on the whole economy

Answer 1

A. it is better to lend him when the interest rate is 5% because the higher the interest rate ,theh the amount of money which is earned on the lending so lender will be wanting with preparing a higher rate of interest.

B. This is an unrealistic because the bank in offering 10% on the savings and the bank will be providing the the lending at a higher interest rate so so the bank will be trying to provide it with a higher than 10% and it will be logical to borrow it at more than 10% so it is better to use the savings and get away with the cost as bank will be charging more than 10% so the net opportunity loss the individual will be trying to take it just 10% not more than that because he have a savings to bear with the expenses.

C. When the federal reserve will be lowering the interest rate the company's will be more likely to borrow money because the companies will feel that they are borrowing money at a lower interest rate for a longer period of time so they will be having a flexibility of paying those money for a longer period of time

when the Federal Reserve will be lowering the interest rate it will be stimulating the demand in the economy and it will be generating the employment in the economy as well because the company will be trying to borrow more and that will be producing more jobs and increase in Gross Domestic Product also.