Higher interest rates _____ the opportunity cost of using funds for investment, and they _____ investment.

Question

Quizplus · Accepted Answer

Higher interest rates increase the return on savings and make saving more attractive, which reduces investment. Furthermore, because borrowing costs are higher, investment spending is also higher. The increase in the return on saving outweighs the decrease in investment spending, lowering the amount of investment. Therefore, higher interest rates increase the opportunity cost of using funds for investment while reducing investment.

Higher Interest Rates _____ the Opportunity Cost of Using Funds