Which Of The Four Scenarios On Page 164 Are Most Important Today?
Two Kinds of Entrepreneurs
Robert Alford
Grantham University
BA540 Managerial Economics
Dr. Verl Anderson
February 12, 2013
Two Kinds of Entrepreneurs
Which of these four scenarios on page 164 are most important today? Your answer may include more than one scenario.
Which scenario is most conducive toward economic growth? Which scenario is the most normal historically? (a) higher interest rates, more capital invested (b) lower interest rates, less capital invested (c) lower interest rates, more capital invested (d) higher interest rates, less capital invested. As I begin to research the above four scenarios I will begin to determine which of the four can be conducive toward economic growth. An interest rate is the rate at which interest is paid by borrowers for the use of money that they borrow from a lender. Specifically, the interest rate is a percent of principal paid at some rate. Interest rates play a major role in the pricing of securities and the allocation of capital by businesses and investors. This applies to both debt and equity capital and is therefore of utmost importance to investors. When you think of capital invested you must have an understanding of what capital is. According to Skousen capital has many definitions. It can mean capital goods – tools, equipment, machinery, plants, buildings, …show more content…
infrastructure and technological know-how. Capital also refers to the research and development efforts used to improve the productivity of capital and labor. Finally, capital also refers to investment capital, or the funds used to finance the purchase of real estate, build a factory or fund other business projects.
Interest rates are a major determinant in the demand for capital.
As capital is allocated on a supply and demand basis, increases in lending rates will decrease the demand for borrowed funds and, indirectly, the demand for equity capital because the return investors require on equity capital also rises with interest rates. This reduces capital investment which leads to decreased economic activity in the short term and impairs businesses ' future productive capacity. Of course, decreases in rates have the opposite effects. When we begin to think about higher interest rates this point makes investor fearful in wanting to invest their
capital.
As noted by Skousen he states that interest rates have a significant impact on capital expenditures for several reasons. One reason that he brings to light is the fact that most big businesses are capital-intensive, requiring plants, heavy machinery, and real estate in the production process. He further states that leasing and borrowing are common capital-intensive businesses. When it comes to lower interest rates, less capital invested many would think that would be a bad time to make an investment. However, a low interest rate as a macro-economic policy can be risky and may lead to the creation of an economic bubble, in which large amounts of investments are poured into the real-estate market and stock market.
According to Skousen he states that if interest rates fall in the oil market it will cause the oil companies to create a demand for new oil rigs. Finally higher interest rates will bring about less capital being invested. Because when the interest rates are high what this causes is less capital to be invested. This also lets investors realize that when the interest rates are high they will have to worry about what they are investing toward will create enough revenue in the future to cover the initial investment. In conclusion, when it comes to which scenario is the most normal historically I would say that when the interest rates are low companies are more apt to seek to make some sort of capital investment. When this occurs they are capitalizing on future dividends which ultimately give them more money back from the investment.
References
Insight-Mild inflation, low interest rates could help economy". Reuters. 2 August 2011.
Skousen, Mark, Economic Logic Revised 3rd Edition, Eagle Publishing Company, Washington, DC, 2010
www.investorwords.comwww.wikipedia.com
Robert Alford
Grantham University
BA540 Managerial Economics
Dr. Verl Anderson
February 12, 2013
Two Kinds of Entrepreneurs
Which of these four scenarios on page 164 are most important today? Your answer may include more than one scenario.
Which scenario is most conducive toward economic growth? Which scenario is the most normal historically? (a) higher interest rates, more capital invested (b) lower interest rates, less capital invested (c) lower interest rates, more capital invested (d) higher interest rates, less capital invested. As I begin to research the above four scenarios I will begin to determine which of the four can be conducive toward economic growth. An interest rate is the rate at which interest is paid by borrowers for the use of money that they borrow from a lender. Specifically, the interest rate is a percent of principal paid at some rate. Interest rates play a major role in the pricing of securities and the allocation of capital by businesses and investors. This applies to both debt and equity capital and is therefore of utmost importance to investors. When you think of capital invested you must have an understanding of what capital is. According to Skousen capital has many definitions. It can mean capital goods – tools, equipment, machinery, plants, buildings, …show more content…
infrastructure and technological know-how. Capital also refers to the research and development efforts used to improve the productivity of capital and labor. Finally, capital also refers to investment capital, or the funds used to finance the purchase of real estate, build a factory or fund other business projects.
Interest rates are a major determinant in the demand for capital.
As capital is allocated on a supply and demand basis, increases in lending rates will decrease the demand for borrowed funds and, indirectly, the demand for equity capital because the return investors require on equity capital also rises with interest rates. This reduces capital investment which leads to decreased economic activity in the short term and impairs businesses ' future productive capacity. Of course, decreases in rates have the opposite effects. When we begin to think about higher interest rates this point makes investor fearful in wanting to invest their
capital.
As noted by Skousen he states that interest rates have a significant impact on capital expenditures for several reasons. One reason that he brings to light is the fact that most big businesses are capital-intensive, requiring plants, heavy machinery, and real estate in the production process. He further states that leasing and borrowing are common capital-intensive businesses. When it comes to lower interest rates, less capital invested many would think that would be a bad time to make an investment. However, a low interest rate as a macro-economic policy can be risky and may lead to the creation of an economic bubble, in which large amounts of investments are poured into the real-estate market and stock market.
According to Skousen he states that if interest rates fall in the oil market it will cause the oil companies to create a demand for new oil rigs. Finally higher interest rates will bring about less capital being invested. Because when the interest rates are high what this causes is less capital to be invested. This also lets investors realize that when the interest rates are high they will have to worry about what they are investing toward will create enough revenue in the future to cover the initial investment. In conclusion, when it comes to which scenario is the most normal historically I would say that when the interest rates are low companies are more apt to seek to make some sort of capital investment. When this occurs they are capitalizing on future dividends which ultimately give them more money back from the investment.
References
Insight-Mild inflation, low interest rates could help economy". Reuters. 2 August 2011.
Skousen, Mark, Economic Logic Revised 3rd Edition, Eagle Publishing Company, Washington, DC, 2010
www.investorwords.comwww.wikipedia.com