I’m unequivocally confused when it comes to the little things in my section upon “monetary policy”… if the seductiveness rate rises, item direct decreases (because ppl will not reason upon to their money, they will deposit it in holds as well as things similar to which to produce the tall interest/profit upon it).. BUT it additionally says which as seductiveness rate rises…investment spending decreases?? How does which have sense.. because wouldn’t investment spending increase???
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{ 2 comments… read them below or add one }
Well when interest rate rises, that means that expensive projects and equipment are now more costly. Businesses usually don’t have all the money to buy their machinery and accessories, so they take out loans which they can pay back later. So if a company needs machinery, but the interest rate has gone up, then the marginal benefit may not be as high and promising than the companies hope for. Therefore they don’t invest at times of high interest rates because that reduces their profit since its more expensive.
When interest rate increases it is more costly to borrow so people will only invest in more profitable projects so total investment will decline . That is the demand for loans will decline.
However The supply of loanable funds will increase with rising interest rates because people will hold less of their money in liquid assets. That is the supply of loanable fund will increase.
This means that the actual interest rate you see in the market will be that where the supply equals demand.
The reason interest rate vary over time is that when the economy is good investments are more profitable so the amount people want to borrow at any given interest rate increases. Since higher rates also increase the amount of loan available, the amount of investment spending is more when interest rate are high