Question

(Ch. 4 Level of Interest Rates) State whether you agree or disagree with the following statement: “Implementing structural reforms that make it easier and less costly to open a business and in general foster a more business-friendly climate in a given country is likely to put upward pressure on real interest rates in the country in the short run, all else equal”. Explain your answer. (Maximum 3 sentences, maximum 100 words.)

Answer 1

As the climate of the country becomes more business friendly and becomes less costly to open a business many people would be looking for funds to start a business. This will increase the demand for loanable funds. As per the forces of demand and supply with an increase in the demand for funds the cost of the funds will increase and so we can say that the real interest rates in the country will increase.