The reason business investment is sensitive to interest rates is that
A) interest rates are a lagging indicator, so they signal to firms the state of the economy.
B) most funds used for investment are borrowed, so firms incur an interest charge.
C) interest rates indicate how aggressive government policy is about fighting recessions.
D) firms charge interest on any investment they make.

Question

Quizplus · Accepted Answer

Business investment typically involves borrowing funds, which means firms must pay interest charges on these loans. Therefore, when interest rates are high, it becomes more expensive for businesses to borrow money for investment, and this can impact their investment decisions. Conversely, when interest rates are low, borrowing becomes cheaper, and firms may be more likely to invest in additional production capacity or other projects.

The Reason Business Investment Is Sensitive to Interest Rates Is