A firm's level of investment depends on the market interest rate:
A)only when the firm has to borrow funds to invest in new equipment.
B)only when the firm has to borrow funds to buy stocks and bonds.
C)only when the firm already has sufficient funds and could lend them.
D)because the interest rate represents the opportunity cost of investing in capital.
E)because investments are always made with borrowed funds.

Question

Quizplus · Accepted Answer

The interest rate represents the opportunity cost of investing in capital, meaning that a firm must weigh the return on investment against the cost of borrowing funds to finance that investment. Therefore, the level of investment is affected by the market interest rate regardless of whether the funds are borrowed or already available. Options A, B, and E are too narrow in their scope and do not account for all potential scenarios. Option C is not relevant to the relationship between investment and interest rates.

A Firm's Level of Investment Depends on the Market Interest