How do interest rates affect investment in the economy?
A)Lower interest rates lower the cost of borrowing for firms, and so investment rises.
B)Lower interest rates lower the after-tax profit for firms, and thus investment falls.
C)Higher interest rates lower the cost of borrowing for firms, and so firms save more in banks.
D)Higher interest rates increase government expenditure and thus raise investment.

Question

Quizplus · Accepted Answer

Lower interest rates reduce the cost of borrowing for firms, which can increase their incentive to invest in projects that have higher expected returns. This can stimulate economic growth and job creation. Conversely, higher interest rates can increase the cost of borrowing for firms, which can reduce their incentive to invest and lead to lower economic growth.

How Do Interest Rates Affect Investment in the Economy