Longrun real interest rates are expected to increase An acco

Long-run real interest rates are expected to increase. An accountant and an MBA student (who just finished his course of ) where interviewed regarding the effect on the firm they both work at. Keeping all else constant, their answer would likely differ. How do you guess the interviewed will answer? Does the difference in response matters? If yes, why? If not, why not?

Solution

An accountant looks at things with a different perspectiv and an MBA looks at things with a different perspective.

An accountant takes into consideraton only explicit cost. Therefore, he would only say that the cost of borrowing for the firm will increase. It will have ot pay higher rate fo interest and hence, it must utilize capital more efficiently ot gain optimum.

An MBA will take into consideration not only explicit cost but also implicit cost. He will also consider that the opportunity cost of self invested capital will increase. It will require business ot produce more else it may be so that opportunity cost of capital increases the profitability of business.

Keep in mind, Explicit cost is cost of hired factors of production. In this context, interest paid on loan taken from others.

Implicit cost is opportunity cost of self owned factors of production. In this context, interest foregone by investing own capital in business.