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Author Question: Use the concept of present value to explain the inverse relationship between the interest rate and ... (Read 314 times)

jilianpiloj

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on: Jun 29, 2018
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

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Reply #1 on: Jun 29, 2018
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


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