Economics · Macroeconomics and Monetary Policy
A multinational corporation (MNC) is deciding between holding its surplus funds in a liquid bank account earning 4 percent or investing in a new factory with an expected internal rate of return (IRR) of 9 percent. However, the economist at the MNC predicts that the central bank is about to enter a 'contractionary' phase of the business cycle. How would this prediction most likely influence the MNC's decision regarding the 'speculative demand' for money?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The MNC will invest in the factory immediately to lock in the 9 percent return before rates fall.
- 2The MNC will increase its speculative demand for cash, anticipating that interest rates will rise further and bond/asset prices will fall.✓
- 3The MNC will ignore the central bank's phase and choose the factory because 9 percent is higher than 4 percent.
- 4The MNC will convert its surplus into foreign currency to avoid the business cycle entirely.
Correct answer
The MNC will increase its speculative demand for cash, anticipating that interest rates will rise further and bond/asset prices will fall.
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