Given the expected rate of return on all possible investment opportunities in the economy, a(n):
A) Increase in the real rate of interest will tend to increase the level of investment
B) Decrease in the real rate of interest will tend to increase the level of investment
C) Decrease in the real rate of interest will tend to decrease the level of investment
D) Change in the real interest rate will have no impact on the level of investment

Question

Quizplus · Accepted Answer

A decrease in the real rate of interest will lower the cost of borrowing money and thus make it more attractive for businesses to invest in projects with a rate of return that exceeds the lower interest rate. This will tend to increase the level of investment. Conversely, an increase in the real rate of interest will increase the cost of borrowing money and make it less attractive to invest in new projects, which will tend to decrease the level of investment.

Given the Expected Rate of Return on All Possible Investment