The rate of interest is an important determinant of investment spending,even if a firm does not need to borrow funds.Why is this?
A)Because the lower the rate of interest,the higher will be the opportunity cost of investment.
B)Because instead of investing,the firm always has the choice of putting its funds in a savings account which will pay a return.
C)Because investment is usually more profitable than saving.
D)Because the higher the rate of interest,the lower inflation rate.

Question

Quizplus · Accepted Answer

The rate of interest affects investment spending because firms have the option to save their funds in an account that earns interest instead of investing. This means that when interest rates are higher, saving becomes more attractive relative to investing, influencing the firm's decision even if it doesn't need to borrow money.

The Rate of Interest Is an Important Determinant of Investment