How Low-Interest Rates Can Freeze the Economy

1. Briefly summarize the main point(s) of  article.
2. In the article, it describes large and small firms borrowing money as a result of low-interest rates. What do the firms spend the money on?
3. As a result of the firms’ expansion, what happens to the amount they are able to produce?
4. Draw a long-run ATC (Average Total Cost) function. Label the areas of Economies of Scale, Constant Returns to Scale, and Diseconomies of Scale.
5. Thinking about the graph above and the different areas, what does it mean for a firm to “scale up”?
6. The article mentions that the bigger firms end up driving out the smaller firms because their bigger size steals the customers. What is likely true about the costs per unit of the bigger firms (especially as they expand or scale up) that allows them to do this?
7. In your graph from above (part 5), label where you would expect to find the small-sized firms and the large-sized firms relative to each other for this to happen. Which area must the small firms be in? Which area(s) are the large firms likely in? Explain.

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Summary of the article Main point While lowinterest rates initially help both large and small firms borrow and expand they can ultimately benefit large firms more potentially freezing out smaller comp... View the full answer