question archive This question is on the determination of the real interest rate in the long run
This question is on the determination of the real interest rate in the long run
Subject:EconomicsPrice:2.86 Bought3
This question is on the determination of the real interest rate in the long run.
Use the diagram showing savings and investments as functions of the real interest rate to answer the following question: What happens to the real interest rate and investment if there is a temporary decrease in production, for example, a bad harvest?
Select one or more:
a. The real interest rate increases and investment increases
b. The real interest rate increases and investment decreases
c. The real interest rate decreases and investment increases
d. The real interest rate decreases and investment decreases
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b. The real interest rate increases and investment decreases.
Step-by-step explanation
When there is a bad harvest, a reduction in production, it means the level of investments reduces because firms and individuals are not able to invest again because they fear another bad harvest. The interest rate increases because the money supply reduces in the economy, borrowers save more because they have less money to invest. The lending reduces gradually because there is no return when it comes to productivity hence the interest rate increases because the lenders have no other option than to increase the intended interest rate.
