To start with, it’s important for us to look at the definitions of each concept given in these situations. Nominal interest rates refer to interest rates which do not consider the effects of inflation when calculating. Real interest rates, on the other hand, account for inflation. In this case, the interest rates for America and Euro area will be eight (8) percent and nine (9) percent respectively. These figures of nominal rates arrive by adding real interest’s rate to inflation rates. In this case the real interest rate is at 5 % plus 3 % inflation rates in the United States to get 8 % while on the other hand for Euro area the real interest rates are at same rate of five percent and the Euro area changes inflammation to 4 % to get nominal interest rates we add 5 % plus 4 % to 9 % (NICKOLAS, 2019).
The above figures play an important role for the Exeter to make critical investment decisions since it’s the interest’s rates, which drives the economy of any country in the world. Looking at the two scenarios and circumstances of these interests rates in united states and euro area Axetem will invest more in United States than in Euro areas some of the implications include the following: increased production and investment in the United States compared to euro area, increasing marketing campaigns for their products in the United States than euro area, low cost of doing business in the United States.
Interest rates play an important role in the decisions concerning the investments for the Exeter to maximize profit and minimize the cost; the company must look at the country with low-interest rates (Krainer, 1966). This is because the cost of doing business influence success in many ways; the right decisions for Exeter is to increase productions in the United States and lower its production in the euro area. These decisions are informed based on interest rates in the United States are low compared to the euro area. The United States provides an excellent conducive environment for doing business since the cost of borrowing loans to expand production is low and more returns are expected, compared to expanding business operations in Euro area where the interest’s rates are higher than that of United States, and the cost of doing business is high.
More productions need more marketing campaigns to create awareness of the products in the United States market. Some of the most marketing campaigns are the use of social media such as Facebook, Instagram, and tweeter others include the use of the televisions shows billboard, among others. Social media has been an outstanding tool to increases the sale for the companies and the cases of Axetem, hence there will be no big difference it will be able to penetrate United States market and increase its sales resulting to more profits as a result.
In addition to that, inflation rates in the Europe are low compared to the United States, which means that there is more economic growth than the United States. Growing economy is vital for Exeter to invest in and grow its market share. Inflation rates affect the prices of products of Axetem significantly. Therefore in the United States, the prices will be lower compared to that of the Euro area. Low prices increase demand for the products produced by expansion activities of Exeter. High demand for the products will have a tremendous positive impact Axetem company (Mark Vella, 2016).
Krainer, R. E., (1966). Interest Rates, Investment Decisions, and External Financing. Oxford Economic Papers, 304-312.
Mark Vella, C. C. (2016). Understanding interest rates and their impact on investment decisions. TIMES MALTA.
NICKOLAS, S., (2019). Real vs. Nominal Interest Rates: What’s the Difference? New York City: Investopedia.
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