Which of the following is a true statement relative to retained earnings and investment?
A) Lower interest rates stimulate borrowing for investment, but have no effect on the use of retained earnings for investment spending.
B) Lower interest rates stimulate borrowing for investment, but discourage the use of retained earnings for investment.
C) Lower interest rates reduce the opportunity cost of retained earnings, stimulating the use of these funds in investment.
D) Lower interest rates have no effect on investment spending at all because investment spending is autonomous.

Question

Quizplus · Accepted Answer

Lower interest rates reduce the opportunity cost of using retained earnings for investment, making it more appealing to invest those funds. This is because the cost of borrowing is lower, making it less attractive to borrow for investment purposes. Option A is false because lower interest rates affect investment spending, regardless of the source of funding. Option B is also false because lower interest rates make borrowing more attractive, not less. Option D is false because interest rates do affect investment spending, so it is not autonomous.

Which of the Following Is a True Statement Relative to Retained