Other things equal, an increase in the interest rate leads to:
A) a decrease in the quantity of investment goods demanded.
B) no change in the quantity of investment goods demanded.
C) an increase in the quantity of investment goods demanded.
D) sometimes an increase and sometimes a decrease in the quantity of investment goods demanded.

Question

Quizplus · Accepted Answer

An increase in the interest rate makes borrowing money more expensive, which reduces the profitability of investing. As a result, firms demand fewer investment goods, leading to a decrease in the quantity of investment goods demanded.

Other Things Equal, an Increase in the Interest Rate Leads