When the capital utilization rate, , is added to the model the interest rate becomes countercyclical.

Question

When the capital utilization rate,  , is added to the model the interest rate becomes countercyclical.

Quizplus · Accepted Answer

When the capital utilization rate is added to the model, the interest rate becomes countercyclical, meaning it moves in the opposite direction of the business cycle. This is because as capital utilization increases during periods of economic growth, the demand for credit also increases, which leads to higher interest rates. Conversely, during economic downturns when capital utilization decreases, the demand for credit decreases, leading to lower interest rates.

When the Capital Utilization Rate, , Is Added to the Model