If the quantity of investment has fallen but interest rates have risen,then

Question

Quizplus · Accepted Answer

According to the classical model, the quantity of investment is solely determined by interest rates. Therefore, if interest rates have risen and the quantity of investment has fallen, it cannot be explained in the classical model. However, if we consider the Keynesian model, a fall in investment could be due to a fall in savings because lower savings mean less funds available for investment. This could also lead to higher interest rates as the demand for funds increases, which could further decrease investment. Therefore, savings falling is the most likely explanation.

If the Quantity of Investment Has Fallen but Interest Rates