The Movement Of Interest Rates In The Short Run And Long Run?

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Today, many people question if the movement of interest rates affect the profitability of a firm in the short run or the long run. Interest rates are always changing, and different types of loans offer various interest rates. The bank, constitution, or person lending the money issues interest rates on loans to compensate the risk of loaning money. Thus, firms borrow money from banks in order to increase their business activity to generate profits. Overall, the movement of interest rates may affect the profitability of a firm in both the short run and the long run. Profitability affects the financial strength of a firm and has implications for its ability to weather downturns. Additionally, the permanence or impermanence of the recent improvement …show more content…
It is also the time where firms attempt to increase their output. If a firm is capital intensive and borrows money to finance investment and production, then a rising interest rate increases the firm 's expenses and therefore decreases its profitability. This is truer in the short term, because it takes time for the firm to gradually roll out price increases to its customers and lower its inventory and fixed capital investment, in order to offset its rising interest expenses. With this being said, there are several ways in which moving interest rates may affect a firm’s profitability in the short run. First, a firm will borrow money from banks in order to increase business activity. That is, the firm will have money to produce more goods and services for its consumers while having the necessary equipment and so forth used in producing these items. Obvious enough, the firm must pay the money it borrows back. A firm may charge interest on consumers who pay for goods and services through credit. In this case, a firm is not only generating profit, but it is also gaining money to pay back the money it borrowed. It is also important to note that “When interest rates rise, small business owners must set aside more money to repay loans and other debts. This in turn reduces a business’ available income and can affect its …show more content…
The profitability of the firm is less hurt in the long term. This is because the firm will have ample time to make the adjustments that it could not in the short run. However, the firm will still be hurt: even in the long run, any firm that requires capital for production and must finance that capital will be less profitable when interest rates are higher. Overall, in the long run of a firm, the interest rate, and the price level of goods and or services are determined in sequence of each other resulting in the firm’s profitability. First, the firms output is calculated by the amount of resources and technology available to create goods. Next, for any number of output, the interest rate adjusts to balance both the supply and demand curve for loanable funds. Finally, given the number of output and the interest rate, the price level of the products fluctuates to balance the supply and demand for money. Changes in the supply of money lead to proportionate changes in the price level of the products and services. This being said, it is easier to understand that when interest rates rise, company or firm owners find it more difficult to borrow money because of the high interest that must be paid. Thus, firms would be less willing to borrow money, as the interest burden weighs heavy. The firm would then in turn, postpone their investment and

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