<p>Interest rates and investment have a negative relationship, the phrase I had drilled into my head the entire year by my teacher. If the cost of a loan is higher, why invest more?</p>
<p>I think that’s only in a domestic economy though, or when you’re not dealing with foreign exchange. I always thought that higher interest rates attract foreign investors because they get higher returns on their investments.</p>
<p>Nightingales is correct.</p>
<p>What you guys are saying is correct but you have to understand that there are different kinds of interest. In terms of bonds/stock, higher interest rates will lead to bigger returns. Though macro doesn’t really test on bonds an stocks I you guys might have noticed. The interest rates in terms of the foreign exchange maker usually refer to bank interest. I cant really say wju but in class pir teaher always stressed this. I think padt FRQs ha similar deals if I can find one.From Wikipedia (the BEST resource for everything), “The central banks or reserve banks of countries generally tend to reduce interest rates when they wish to increase investment and consumption in the country’s economy.”</p>
<p>The key is RELATIVE interest rates. Consult any textbook or review book. I don’t know why this is such a contentious point; it’s simple economics.</p>
<p>I agree that it was relative, I just don’t get why higher relative interest in Europe would encourage more investment there.</p>
<p>Is there a google doc yet?</p>
<p>"When the central bank of a country decides to raise interest rates this not only affects the short term rate that they target, but the interest rates for all types of debt instruments. If the central bank of a country raises interest rates then debt instruments of all types are going to become more attractive to investors, all else being equal. This means that not only are foreign investors more likely to invest in the debt of that country, but also that domestic investors are less likely to look outside the country for higher yield, thus creating more demand for the debt of that country and driving the value of the currency up.</p>
<p>On the other hand, when a central bank lowers interest rates, this causes the interest rates on all types of debt instruments for that country to be less attractive to investors. Therefore not only does this mean that both foreign and domestic investors are less likely to invest in the debt of that country, but it also means that they are also more likely to withdraw investment in order to obtain higher returns in other countries, which creates less demand for, as well as a greater market supply of that currency, and drives its value down."</p>
<p><a href=“http://media.collegeboard.com/digitalServices/pdf/ap/apcentral/ap13_frq_macroeconomics.pdf[/url]”>http://media.collegeboard.com/digitalServices/pdf/ap/apcentral/ap13_frq_macroeconomics.pdf</a></p>
<p>Answer key someone ;)!</p>
<p>1) a. Just draw a typical AD/AS graph. Make sure they intersect with LRAS. Also make sure to mark the price level and output as noted.
b. Increase in savings shifts money supply right which lowers interest rate. Just draw the loanable funds market graph and you’ve got it.
c. i. Expenditures increase, because lower IR makes people willing to take more loans to invest and such.
ii. Economic growth will increase, as investment spending is a part of GDP.
d. i. I said that demand for the euro stays the same, as interest rates only affect money supply.
ii. Money supply decreases with increasing interest rate, so the Euro appreciates. (Show this in a foreign exchange market graph)
e. If the euro appreciates relative to the US dollar, then the dollar depreciates. A depreciating dollar is more attractive to foreign consumers, so exports increase. This gives the US a current account surplus.</p>
<p>2) a. Both goods. I think it’s impossible for only one to have increasing costs, and neither would have increasing costs if the PPF was linear. Since it’s bowed outwards, costs are increasing.
b. A is on the PPF
c. Recession is inside the PPF (not a shift in the PPF).
d. Either increasing government spending or lowering taxes. (Must be FISCAL)
e. Increase. The recession puts pressure for lower wages (lower labor demand), and the lower costs on factors of production shifts SRAS right.</p>
<p>3) a. A downward sloping line. Have the axes be unemployment and inflation. (I’m not sure if it can curve or not, it might be allowed to.)
b. Increases in expected inflation shift the short run phillips curve up.
c. No shift. The long run phillips curve only shifts with LRAS, which is unaffected by expected inflation.
d. i. Increase. Upward pressure on wages because people want the same purchasing power as before, so they need higher nominal wages.
ii. Stay the same. No changes in money supply or money demand yet.
e. Growth rate of GDP is a red herring. Real = Nominal - Inflation, so 5%.</p>
<p>1d. Demand for the euro increases. Interest rates can also change demand for money. In this case, it isn’t traditional because it’s the international market. If the interest rate in the euro zone is higher, the demand for the euro increases because investors demand more euros to invest because they can expect a relatively higher return in the euro zone.</p>
<p>Okay, I’ll concede that one. Another thing we weren’t really taught. Oh well. =/</p>
<p>I messed up on the euro ones but I’ll get continuity points for following the same line of thinking. Also didn’t shift the SRPC, just moved along the line. Everything else was the same. Feeling pretty good.</p>
<p>Omg idk how many times this has been said but higher interest rates = LOWER investment. We’re not talking about stocks and bonds here folks. We’re talking about investing in capital, which requires LOANS. Lower interest rates encourages people to borrow money to invest in capital. Geez.</p>
<p>EDIT: 1d) i.demand for euros decrease.
1d) ii. Euros depreciate relative to US dollars
1e) because Euro’s are worth less, US exports decrease, and US imports increase.
I put what TheBombingRange put down for SRPC, no shift.</p>
<p>You’re actually wrong. Think about it this way. I’m American and I want to loan my money out to people in the UK. If the interest rate in the UK is higher, then I get more money paid back to me on that loan than if it was lower. You have to think about this internationally.</p>
<p>That’s the thing. I’m not talking about the people loaning money though. I’m talking about I in Real GDP = C + I + G + NX where I is investment in captial. I’m talking about the people borrowing money. Maybe I’m wrong but we’re talking about two different things. I’m talking about borrowing while you’re talking about loaning. Idk we’ll find out soon enough.</p>
<p>It’s like 2 points…and who knows, it might be both.</p>
<p>The higher interest rate increases the demand for the Euro in the FOREX market. Americans will want to put money in European banks to take advantage of the higher interest rates. However, they can’t put US dollars in foreign banks. Americans will demand more euros and will supply more US dollars in the FOREX market. This will appreciate the euro and depreciate the dollar.</p>
<p>Check the 2007 Form B FRQ if you want confirmation:
<a href=“Supporting Students from Day One to Exam Day – AP Central | College Board”>Supporting Students from Day One to Exam Day – AP Central | College Board;
<p>Answer Key:
<a href=“Supporting Students from Day One to Exam Day – AP Central | College Board”>Supporting Students from Day One to Exam Day – AP Central | College Board;
<p>Thanks, that makes sense.</p>
<p>Pretty sure money supply shifts left too, but that just appreciates the euro more anyway.</p>