Interest Rates And Capital Investments - 865 Words

The four areas of Interest and Capital we are going to look at are: higher interest rates with more capital invested, lower interest rates with less capital invested, lower interest rates with more capital invested, and higher interest rates with less capital invested. Interest rates are a critical tool of monetary policy and are taken into account when working with factors such as unemployment, inflation, and investments (Skousen, 2014). In the first scenario, we are looking at an outward shift in the demand for capital occurs in an economic boom when increased construction of plants, building, and other capital-intensive business activities requires huge outlays of investment. In this situation, interest rates tend to rise along with capital invested. (Skousen, 2014) The US economy began getting stronger in the early 1980s, it’s steadiest growth since the 1960s. This was in large part due to the Federal Reserve analyzing the economy and raising interest rates when it thou ght the economy was weak then plunging when they thought the economy was too strong. (Krugman, 1991). During this period, capital investment was at an all-time high, largely due to a banking industry deregulation. Financial institutions were attempting to take advantage of better returns on their investments due to the high interest rates. During this time the US markets had become attractive for external investing opportunities resulting in investing from external sources as well as from within theShow MoreRelatedExplain the Concept of Discounting and Its Importance in the Theory of Investment Expenditure.1692 Words   |  7 PagesThere are trade-offs involved in every economic decisions. 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