Imagine an economic situation, where people are increasingly borrowing more and spending more at a low...

Imagine an economic situation, where people are increasingly borrowing more and spending more at a low interest rate. Assets' values are also growing at a faster rate. However, the productivity of the businesses is growing at a fixed rate that is lower than the interest rate. Do you think this situation is sustainable? In the long run, how the lenders, borrowers, and businesses would be affected by such an economy?

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Expert Solution

This situation will not be sustainable in the long run because when the the demand will be higher, there will be a higher amount of inflation and there will be higher interest rate in order to counter that inflation by a rational Central Bank and when there will be a higher inflation it will mean that the businesses are going to gain on their profits as they will be able to make more through more demand in economy.

When there will be an increasing borrowing, it will mean that there will be stimulation of demand and people are borrowing more in order to invest more or demand more so it will be leading to inflation in the demand of the business products and prices of the products and there will be inflationary situation and it would be leading to more profit for the business because under such situation when the interest rates are lower the businesses cannot be making lower profits even if there is a higher demand and higher inflation and there is unsustainable economic situation according to this criteria.

I do not think that this situation is sustainable because lenders will be getting affected adversely by having a lower interest rate whereas only borrowers will be getting positively affected and even if it is given that businesses are not even able to make appropriate amount of money, so this cannot be sustainable for the longer period of time as when there will be a higher demand the businesses are going to raise their prices and the lender are also going to increase their interest rates because the central bank will be increasing the interest rate in order to counter the inflation in the economy.

jeff jeffy answered 1 year ago

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