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 by making borrowing less expensive and more attractive. Therefore, companies are more likely to use retained earnings for investment when interest rates are low. Option A is incorrect because lower interest rates do affect the use of retained earnings for investment spending. Option B is incorrect because lower interest rates encourage borrowing and investment spending but do not necessarily discourage the use of retained earnings for investment. Option D is incorrect because investment spending is influenced by various factors, including interest rates.

Which of the Following Is a TRUE Statement Relative to Retained