An increase in the interest rate:
A) reduces planned investment, because the interest rate is the cost of borrowing to finance investment projects.
B) increases planned investment, because people who make money from interest have more money to invest.
C) has no effect on investment.
D) may be caused by a drop in investment demand.

Question

Quizplus · Accepted Answer

An increase in interest rates tends to increase the cost of borrowing, resulting in a decrease in planned investment. As such, choice A is the correct answer. Choice B is incorrect because an increase in interest rates typically does not result in people having more money to invest. Choice C is incorrect because interest rates do have an effect on investment. Choice D is also incorrect because a drop in investment demand may lead to a decrease in interest rates, not an increase.

An Increase in the Interest Rate