An increase in the interest rate will
A)have no effect on investment,since investment is autonomous
B)increase investment,since it will be more profitable to hold stocks and bonds
C)increase investment,since people will be less willing to hold money
D)decrease investment only if firms have to borrow money to make investments
E)decrease investment regardless of whether firms have to borrow money to make an investment

Question

Quizplus · Accepted Answer

An increase in interest rate will have a negative effect on investment since it will increase the cost of borrowing money for investment purposes. This will make investments less attractive to firms, causing a decrease in investment. This effect holds true regardless of whether firms have to borrow money to make the investment.

An Increase in the Interest Rate Will