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)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; leaves unaffected
E)decreases; decreases

Question

Quizplus · Accepted Answer

An increase in the real rate of interest increases the cost of holding an inventory of a given size (as it becomes more expensive to finance the inventory) and therefore decreases desired investment expenditure.

A Rise in the Real Rate of Interest ________ the Opportunity