The investment demand curve suggests that
A) changes in the real interest rate will not affect the amount invested.
B) there is an inverse relationship between the real rate of interest and the level of investment spending.
C) an increase in business taxes will tend to stimulate investment spending.
D) there is a direct relationship between the real rate of interest and the level of investment spending.

Question

Quizplus · Accepted Answer

The investment demand curve suggests an inverse relationship between the real interest rate and the level of investment spending. As the real interest rate increases, the cost of borrowing money to invest in capital goods increases, which reduces the level of investment spending. Conversely, as the real interest rate decreases, the cost of borrowing money to invest in capital goods decreases, which increases the level of investment spending. Therefore, option B is the correct answer. Option A is incorrect because changes in the real interest rate do affect the amount invested. Option C is incorrect because an increase in business taxes would reduce profits, which would lead firms to reduce investment spending. Option D is incorrect because there is an inverse relationship, not a direct relationship, between the real rate of interest and investment spending.

The Investment Demand Curve Suggests That