An increase in the interest rate results in
A)a smaller opportunity cost of investment and so planned investment spending increases.
B)a smaller opportunity cost of investment and so planned investment spending decreases.
C)a greater opportunity cost of investment and so planned investment spending decreases.
D)a greater opportunity cost of investment and so planned investment spending increases.

Question

Quizplus · Accepted Answer

An increase in the interest rate indicates a higher cost of borrowing money. This increases the opportunity cost of investment, as the cost to borrow money for investment projects has increased. Therefore, planned investment spending decreases as businesses will be less likely to engage in investment projects with a higher cost of capital.

An Increase in the Interest Rate Results in