Given the expected rate of return on all possible investment opportunities in the economy:
A)an increase in the real rate of interest will reduce the level of investment.
B)a decrease in the real rate of interest will reduce the level of investment.
C)a change in the real interest rate will have no impact upon the level of investment.
D)an increase in the real interest rate will increase the level of investment.

Question

Quizplus · Accepted Answer

According to the investment demand curve, a higher real interest rate would mean that the cost of borrowing funds would increase, and therefore reduce the level of investment. Thus, an increase in the real rate of interest will reduce the level of investment, making option A the correct choice.

Given the Expected Rate of Return on All Possible Investment