What effect will an increase in the interest rate have on investment?
A) An increase in the interest rate will lead to an increase in investment, because holding stocks and bonds will be more profitable.
B) An increase in the interest rate will lead to an increase in investment, because people will be less willing to hold money.
C) An increase in the interest rate will lead to a decrease investment only if firms have to borrow money to make investments.
D) An increase in the interest rate will lead to a decrease investment regardless of whether firms have to borrow money to make an investment.

Question

What effect will an increase in the interest rate have on investment?  
A) An increase in the interest rate will lead to an increase in investment, because holding stocks and bonds will be more profitable. 
B) An increase in the interest rate will lead to an increase in investment, because people will be less willing to hold money. 
C) An increase in the interest rate will lead to a decrease investment only if firms have to borrow money to make investments. 
D) An increase in the interest rate will lead to a decrease investment regardless of whether firms have to borrow money to make an investment.

Quizplus · Accepted Answer

An increase in the interest rate will lead to an increase in the cost of borrowing, which will make borrowing less attractive to firms. This will lead to a decrease in investment as firms will have less access to funds to make investments. Additionally, an increase in the interest rate will make holding money or bonds more attractive, so individuals may be less likely to invest in stocks. Overall, an increase in the interest rate will lead to a decrease in investment regardless of whether firms have to borrow money to make an investment.

What Effect Will an Increase in the Interest Rate Have