FIN 3005 FIN3005 Week 1 Individual Work 2 (Everest University)

FIN3005 Week 1 Individual Work 2 (Everest University)

Questions and Application

1. Interest Rate Movements. Explain why rates changes as they did over the past year.

2. Interest Elasticity. Explain what is meant by interest elasticity. Would you expect federal government’s demand for loanable funds to be more or less interest-elastic than household demand for loanable funds? Why?

3. Impact of Government Spending. If the federal government planned to expand the space program, how might this affect interest rate?

4. Impact of a Recession. Explain why interest rates tend to decrease during recessionary periods. Review historical interest rates to determine how they reacted to recessionary periods. Explain this reaction.

5. Impact of the Economy. Explain how the expected interest rate in one year depends on your expectation of economic growth and inflation.

Flows of Funds Exercise

a. Explain why Carson should be very interested in future interest rate movements.

b. Given Carson’s expectations, do you think that the company anticipates that interest rates will increase or decrease in the future? Explain.

c. If Carson’s expectations of future interest rates are correct, how would this affect its cost of borrowing on its existing loans and on future loans?

d. Explain why Carson’s expectations about future interest rates may affect its decision about when to borrow funds and whether to obtain floating-rate or fixed-rate loans.