A rise in the real rate of interest the opportunity cost of holding an inventory of a given size, and therefore desired investment expenditure.
A)decreases; decreases
B)increases; increases
C)decreases; leaves unaffected
D)increases; decreases
E)decreases; increases

Question

Quizplus · Accepted Answer

According to the given statement, when the real rate of interest increases, it increases the opportunity cost of holding an inventory of a given size. As a result, the desired investment expenditure decreases. Therefore, the answer is (D) that is, an increase in the real interest rate leads to a decrease in desired investment expenditure.

A Rise in the Real Rate of Interest the Opportunity