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    High Rates, High Investment

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    Using one the four scenarios referred to in the chapter, choose periods when each scenario has occurred in the U.S. or other countries:

    Scenario 1: Decreased shift in the demand for capital occurs in an economic downturn or recession. The economy stops growing, the real estate market collapses, and new building permit stops. The result? Lower interest rates and less capital invested.

    1. higher interest rates, more capital invested
    2. lower interest rates, less capital invested
    3. lower interest rates, more capital invested
    4. higher interest rates, less capital invested

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    Solution Preview

    Scenario 1: High interest rates and more capital invested:

    This strange connection occurred during the post World War II boom in the US. An economic explosion from 1946 to the early 1970s saw steadily rising interest rates throughout.

    After an initial inflationary spurt in 1945, the "Golden Age" of American capital flourished for a full generation or more, from 1946 to 1970 (or so) interest rates rose steadily while capital was invested all over the world in increasing rates.
    In 1948, there was a sort-of acceptance of higher rates out of fear for inflation. To be sure, there were periods of low rates, but the trend from 1946 to 1970 was one of a gradual rise in rates that seems to have had no effect on investment capital. Rates were low overall, but the general trend was a ...

    Solution Summary

    It is not common, but greater investment not being affected by greater rates of interest have occurred. An extremely important example was the "Golden Age" boom in the US from 1946-1970.