An increase in the prevailing interest rate
A) increases the present value of future returns from investment, and increases investment.
B) decreases the present value of future returns from investment, and decreases investment.
C) decreases the present value of future returns from investment, and increases investment.
D) increases the present value of future returns from investment, and decreases investment.

Question

Quizplus · Accepted Answer

An increase in the prevailing interest rate will increase the cost of borrowing and make it more expensive for businesses to finance their investments. This will decrease the present value of future returns from investment, as higher interest payments will reduce the amount of profit that can be earned. As a result of these decreased returns, investment will also decrease.

An Increase in the Prevailing Interest Rate