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Prepare a 2-3 page paper using APA format discussing problem 2 in the “Problems to Ponder” at the end of chapter 11.Which of these four scenarios on page 264 are most important today? Your answer may include more than one scenario.
Problem 2 in the Problems to Ponder section at the end of Chapter 11:
Which scenario is most conducive toward economic growth? Which scenario is most normal historically?
Four Scenarios are:
1) Outward Shift in the demand for capital occurs in an economic boom when increased construction of plants, buildings and other capital-intensive business activities requires huge outlays of investment. In this scenario, interest rates tend to rise along with capital invested.
2) Decreased shift in the demand for capital ocurs in an economic downturn or recession. The economy stops growing, the real estate market collapses, and new building permits drop. The result? Lower interest rates and less capital invested.
3) Outward shift in supply of capital occurs in situations where new sources of capital enter the market, either from a domestic savings (people desire to save more) or forgeign investment sources. The greater the supply of capital requires banks and other internediaries to reduce the interest rates and encourage more borrowing. Net result: Lower interest rates and more capital invested.
4) Inward shift in the supply of capital occurs when people decide to cut back on their savings or foreigners withdraw investment capital. With fewer loan-able funds available, banks and other financial institutions must ration the funds, causing interest rates to climb and fewer investments projects. Net result: Higher interest rates, less capital invested.
