Which of the following explains why small reductions in interest rates may not lead to an increase in investment spending?
A)Excess capacity gives businesses little incentive to expand production capacity.
B)Investment demand is elastic with respect to the interest rate.
C)Improved expectations shift the investment demand curve to the right.
D)Banks are eager to make loans at the lower interest rate.

Question

Quizplus · Accepted Answer

Excess capacity refers to the unused productive capacity of a firm. If a firm has excess capacity, reducing interest rates will not lead to an increase in investment spending as there is no need to increase production capacity. Therefore, small reductions in interest rates may not lead to an increase in investment spending if businesses have excess capacity.

Which of the Following Explains Why Small Reductions in Interest