In response to an upturn in the economy, entrepreneurs seek to expand their businesses. What will happen to nominal interest rates and what will happen to investment spending based on the new interest rates? What policy could the Fed use to reverse the trend? Nominal Interest Rates / Investment Spending / New Fed Policy

Question

Skunk

Business

8 December, 04:27

In response to an upturn in the economy, entrepreneurs seek to expand their businesses. What will happen to nominal interest rates and what will happen to investment spending based on the new interest rates? What policy could the Fed use to reverse the trend? Nominal Interest Rates / Investment Spending / New Fed Policy

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Answers (1)

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Ben Hart · Answer 1

The correct answer is: increase; decrease; New Fed Policy

Explanation:

A boost in the economy will cause the entrepreneurs to expand their business. For this, they will need capital or funds. As the demand for loanable funds increases, the demand curve will shift to the right. This will cause the interest rate to increase. At higher interest rates, the demand for loanable funds or investment demand will fall.

To decrease the interest rate the Federal reserve bank adopts a new expansionary policy. The Fed can decrease the discount rate or decrease the required reserve rate. This will lead to an increase in the supply of funds to increase. This will further cause a rightward shift in the supply curve. Consequently, the interest rate will decline.