The investment demand curve suggests:
A) that 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) that 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 shows the relationship between the interest rate and the level of investment spending. As the real interest rate (adjusted for inflation) rises, the cost of borrowing increases, and firms are less likely to invest, leading to a decrease in investment spending. This is an inverse relationship, and so option B is the correct answer. Options A and C are incorrect because changes in the real interest rate and business taxes do affect the level of investment spending. Option D is also incorrect because there is an inverse, not direct, relationship between the real interest rate and investment spending.

The Investment Demand Curve Suggests