The concept of present value helps explain why
A)investment decreases when the interest rate increases,and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.
B)investment decreases when the interest rate increases,but it is of no help in explaining why the quantity of loanable funds demanded decreases when the interest rate increases.
C)the quantity of loanable funds demanded decreases when the interest rate increases,but it is of no help in explaining why investment decreases when the interest rate increases.
D)None of the above are correct;the concept of present value is of no help in explaining why either investment or the quantity of loanable funds demanded decreases when the interest rate increases.

Question

Quizplus · Accepted Answer

Present value is the idea that a dollar earned in the future is worth less than a dollar earned today due to the opportunity cost of not having the money available to invest now. As interest rates increase, the present value of future earnings decreases, making investments less attractive. Similarly, borrowers demand fewer loanable funds as the cost of borrowing (interest rate) increases, as they would have to pay back more in the future due to the decreased present value of future money. Therefore, choice A is the best answer.

The Concept of Present Value Helps Explain Why