ECO 320 Review Questions

May 12th, 2015
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Investments and economic fluctuations depend upon the interest rates by which investors and debtors formulate their decisions on when to invest and when to borrow money.

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ECO 320 Review Questions9. In U.S. data, how sensitive is the demand for money to changes in nominal interest rates?Investments and economic fluctuations depend upon the interest rates by which investors and debtors formulate their decisions on when to invest and when to borrow money. There are many types of interest rates in U.S economy; the two major ones are nominal and real interest rates. Nominal interest rates are when inflation rates are excluded from evaluations of interest. For example, if a company takes loan of $10,000 from the bank and signs the agreement that the loan will be returned in one year with interest rate of 5 percent. This agreed percentage of interest in independent of the inflation which is, suppose, 3%. After one year, the company will return $10,500 with 5 percent of nominal interest. The inflation rate will pay no part in this calculation of values [Mike Moffatt (2015)]. Demand for money is the wished amount of assets in the form of cash that an individual or a company wants to retain in their holdings. Demand for money is affected deeply by the interest rates applicable to the economy [Boundless (2014)]. Nominal interest rates and demand for money are inversely proportional to each other. The decrease in nominal interest rates in an economy develops a perception to public that the cost of borrowing cash or money has gone down and because they have to pay smaller amounts of interests when returning their loans regardless of the infla

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