"Other things the same, an increase in the US interest rate" shifts money demand outward incentivizes...

"Other things the same, an increase in the US interest rate"

shifts money demand outward

incentivizes firms to invest less

makes the dollar depreciate

decreases the opportunity cost of holding dollars

Expert Solution

Other things the same, an increase in the US interest rate:

a) When the interest rate rises, there is a movement along the money demand curve. The money demand curve does not shift as a result of an increase in the US interest rate. (Option 1 is incorrect)\

b) When the rate of interest increases, the cost of borrowing and investing increases. As a result, the investment with a lower rate of return than the interest rate become economically unviable and as a result, the investment falls. (Option 2 is correct)

c) When the interest rate in the United States increases, foreign investors increase their investments in the US markets and as a result, the demand for US dollars in the foreign exchange market increases. This results in the depreciation of the US dollar. (Option 3 is incorrect)

d) The opportunity cost of holding dollars in cash is the foregone interest rate on the cash which would have been earned had it been deposited in a bank account. When the interest rate increases, the opportunity cost of holding dollars increases. (Option 4 is incorrect)

Ans: incentivizes firms to invest less

Rahul Sunny answered 2 years ago

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