Social Economics?

Question

1."When real interest rates are high, so is the opportunity cost of funds." What does this statement mean?

2. Explain why interest rates are sometimes called the "the price of holding money."

3. If investment spending became less sensitive to interest rates, how would this affect the strength of monetary policy?

4. The demand for money will decrease as income falls. Use this fact to explain why interest rates usually fall in a recession.

Answer 1

Reza -- what do you think the answers are? This would be a better learning experience for you, if you take a shot at the answers before posting the questions here.

Answer 2

Macro is not my thing...

1. When the real interest rate goes up, there will be less borrowing and more money coming in for lending. This means, borrower will have higher opportunity cost to borrow or seek something else. Lenders will be attracted to the market. There will be more funds available.

2. This, if I'm not wrong, means when interest rate goes up you will have hard time holding on to your money. You want to put it into savings or whatever. If interest rate goes down, you want to take it out of the saving account and put it some where more productive. So, interest rate can determine the price(in personal level) of holding money.

3. I am not really sure, but when investment spending is less sensitive, then monetary policy is to be stable.

4. Interest rate will fall in recession since business will not borrow as much. Lowering interest rate will promote business to borrow money for expansion.

Answer 3

1. Means the funds could be used for something really useful elsewhere in the economy. Otherwise they would not pay that interest to get the funds

2-3 answered here: http://answers.yahoo.com/question/index;_ylt=AqVyErCfXsdnKjcZs5j.8qEVxgt.?qid=20070604094414AAJF9eq

4. Interest is price of money by #2. Price falls when demand decreases - by basic supply and demand charts.

Answer 4

1. Say a house costs $200,000.00 & interest rates are 5%. Money is "Easy" and lenders will allow a mortgage with 0-5% down ($10,000.00).

As real interest rates rise, the real esate value drops (they have inverse relationship), and lenders require a larger down payment. So the same house is worth $135,000.00, and you need 20% down payment ($27,000.00).

2. A higher interest rate will influence those with money to lend money to get the higher interst rate. A lower interst rate will cause the person with money to find other way's in invest the money (land, equiptment, business)

3. Monetary policy would become less effective.

4. IDK, I'm pooped.