The investment-demand curve suggests:
A)that the amount invested will not be affected by changes in the real interest rate.
B)an inverse relationship between the real rate of interest and the level of investment spending.
C)that an increase in business taxes will tend to stimulate investment spending.
D)a direct relationship between the real rate of interest and the level of investment spending.

Question

Quizplus · Accepted Answer

The investment-demand curve illustrates the inverse relationship between the real rate of interest and the level of investment spending. As the real interest rate increases, the cost of borrowing increases, which discourages investment, leading to a movement up and to the left along the investment-demand curve. Conversely, as real interest rates decrease, the cost of borrowing decreases, which encourages investment, leading to a movement down and to the right along the investment-demand curve. Business taxes have an ambiguous impact on investment spending and can either stimulate or discourage investment spending, making choice (C) incorrect. Choice (A) is also incorrect since changes in real interest rates do affect investment spending. Finally, choice (D) is incorrect because there is an inverse, not a direct, relationship between real interest rates and investment spending.

The Investment-Demand Curve Suggests