Question

The COVID-19 pandemic has had a significant impact on the global economy. In response to COVID, several central banks have lowered interest rates in an attempt to mitigate the economic fallout. Explain how this change in monetary policy (ceteris paribus) will affect

(a) Business fixed investment

(b) Inventory investment

Answer 1

Answer:-

effect of change in monetary policy by central banks on:-

(A) Fixed business investment:-

Fixed business investment is the investment in the fixed assets like machinery plant or building.

when central banks use the monetary policy by decrease the interest rate then that will reduce the cost of borrowing so the business are encouraged to make additional investment on fixed assets. so here by reducing the interest rate will increase the fixed business investment.

(B) Inventory investment:-

Inventory investment means investment in stock like raw material , semifinished goods or finished goods for use for further production or for selling.

when the central banks reduced the interest rate then business think that now time to produce extra units of output rather than tomorrow. so purchasing stock because the cost of borrowing is lower. so business invest more on inventory for making extra production. so reduction in interest rate will increase the inventory investment.