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What consumer behavior and/or investor behavior related to physical capital causes some industries and parts of...

  1. What consumer behavior and/or investor behavior related to physical capital causes some industries and parts of the economy to be more volatile than others? HINT: Do not confuse volatility of economic sectors' sales and output with stock market volatility. We are discussing the economy, not stocks.
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Answer #1

The 'liquidity preference' part of consumer/investor behavior causes some industries and parts of the economy to be more volatile.

Liquidity preference means that sometimes consumers may just want to hold on to the physical money that they have, depending upon the return on their investments- which is directly proportional to the interest rates. If the interest rates are low, the consumers will not invest as the returns are low. This results in high liquidity with the consumers, but little capital available with the industries to expand. This results in increase in interest rates as demand of capital is high and supply is low. Then consumers start investing again which stabilizes the interest rates.

This is what causes volatility in industries.

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