What is the impact of higher interest rates ?
Show answer Hide answer
Answer: C. Leads to a shift in the MEC schedule
Explanation
Higher interest rates increase borrowing costs and alter the marginal efficiency of capital. Investment projects become less profitable when the cost of capital rises. Changes in borrowing costs lead to shifts in the marginal efficiency of capital schedule. The marginal efficiency of capital measures the expected rate of return on investment. Interest rates serve as the primary cost of financing capital investment projects. Investment demand schedules link capital spending to prevailing interest rate levels.
Central banks raise interest rates to cool down overheating investment spending. Businesses evaluate capital investments against current borrowing costs carefully. Macroeconomic investment models rely heavily on marginal efficiency of capital schedules. Option A refers to overall savings behavior rather than capital investment schedules. Option B relates to foreign exchange markets and currency valuation dynamics. Option D incorrectly treats interest rates as movements along the MEC schedule.
Related questions
Q1. What does a price increase result in, assuming all other factors remain constant ?
Show answer Hide answer
Answer: C. A contractions of demand
A price increase along an unchanging demand curve causes a contraction of demand. Higher prices reduce the quantity that consumers are willing and able to purchase. Movements along the curve reflect changes in quantity d...
Q2. Which of the following is NOT a consequence of rising apple demand ?
Show answer Hide answer
Answer: A. a decrease in the number of apple pickers employed
Higher apple demand drives up the market price and increases the value of labor productivity. Employers respond to increased profitability by expanding their workforce and hiring additional apple pickers. Employment of a...
Q3. What occurs when price rises while all other variables remain unchanged ?
Show answer Hide answer
Answer: D. An extension of supply
A price rise along a fixed supply curve results in an extension of supply. Higher market prices provide a stronger profit incentive for producers to increase output. Movements along the supply curve reflect changes in qu...
Q4. What is the consequence of increased demand for a company's products ?
Show answer Hide answer
Answer: C. increases the prosperity of both the firm and the factors hired by the firm.
Increased product demand raises firm revenues and boosts market profitability. Higher product demand increases the derived demand for labor and other factors. Greater factor demand raises employment and compensation, inc...
Q5. What is the effect of a higher marginal propensity to consume (MPC) ?
Show answer Hide answer
Answer: A. raises the value of the multiplier
A higher marginal propensity to consume means households spend a larger share of extra income. Increased consumer spending generates larger successive rounds of income for other economic agents. Larger subsequent spendin...
Q6. When a price shift from 25 pence to 30 pence raises quantity supplied from 40 to 44 units, what is the price elasticity of supply ?
Show answer Hide answer
Answer: B. +0.5
Price elasticity of supply equals percentage change in quantity divided by price change. Quantity supplied rose by ten percent while price increased by twenty percent. Dividing ten percent by twenty percent yields a pric...