Author Question: Use the concept of present value to explain the inverse relationship between the interest rate and ... (Read 312 times)

jilianpiloj

  • Hero Member
  • *****
  • Posts: 521
Use the concept of present value to explain the inverse relationship between the interest rate and the amount of investment a firm undertakes.
 
  What will be an ideal response?

Question 2

If, at the current exchange rate between the dollar and the South African rand of 6.92 rand per dollar, the rand is undervalued, how do you expect demand and supply in the foreign exchange markets to respond?
 
  A) The supply of the dollar will rise, while the demand for the rand will fall.
  B) The supply of the dollar will rise, while the demand for the rand will rise.
  C) The demand for the dollar will rise, while the supply of the rand will fall.
  D) The demand for the dollar will fall, while the supply of the rand will rise.



nathang24

  • Sr. Member
  • ****
  • Posts: 314
Answer to Question 1

As the interest rate falls, the present value of the income stream from an investment rises. Firms should undertake an investment project only if the present value of the income stream is higher than the full cost of the investment. Thus, the lower the interest rate, the greater the likelihood that this will be true. As the interest rate falls, projects that were not previously profitable will become profitable, and the firm's level of investment will rise.

Answer to Question 2

B



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
 

Did you know?

Critical care patients are twice as likely to receive the wrong medication. Of these errors, 20% are life-threatening, and 42% require additional life-sustaining treatments.

Did you know?

About 60% of newborn infants in the United States are jaundiced; that is, they look yellow. Kernicterus is a form of brain damage caused by excessive jaundice. When babies begin to be affected by excessive jaundice and begin to have brain damage, they become excessively lethargic.

Did you know?

Every flu season is different, and even healthy people can get extremely sick from the flu, as well as spread it to others. The flu season can begin as early as October and last as late as May. Every person over six months of age should get an annual flu vaccine. The vaccine cannot cause you to get influenza, but in some seasons, may not be completely able to prevent you from acquiring influenza due to changes in causative viruses. The viruses in the flu shot are killed—there is no way they can give you the flu. Minor side effects include soreness, redness, or swelling where the shot was given. It is possible to develop a slight fever, and body aches, but these are simply signs that the body is responding to the vaccine and making itself ready to fight off the influenza virus should you come in contact with it.

Did you know?

Women are 50% to 75% more likely than men to experience an adverse drug reaction.

Did you know?

The shortest mature adult human of whom there is independent evidence was Gul Mohammed in India. In 1990, he was measured in New Delhi and stood 22.5 inches tall.

For a complete list of videos, visit our video library