Assume That If the Interest Rate That Businesses Must Pay

question 226

Multiple Choice

Assume that if the interest rate that businesses must pay to borrow funds were 20 percent, it would be unprofitable for businesses to invest in new machinery and equipment so that investment would be zero.But if the interest rate were 16 percent, businesses would find it profitable to invest $10 billion.If the interest rate were 12 percent, $20 billion would be invested.Assume that total investment continues to increase by $10 billion for each successive 4 percentage point decline in the interest rate.Refer to the above information.Which of the following is an accurate verbal statement of the described relationship?

• A)There is no regular or dependable relationship between business investment and the interest rate.
• B)The amount of business investment is unaffected by changes in the interest rate.
• C)Investment spending by businesses varies inversely with the interest rate.
• D)Investment spending by businesses varies directly with the interest rate.

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Definitions:

Excess Capacity

A situation where a company can produce more goods or services than currently demanded by the market, indicating underutilization of resources.

Allocated Fixed Costs

Fixed costs that are assigned or distributed across different departments, products, or activities within a company for budgeting and accounting purposes.

Direct Fixed Manufacturing Costs

Fixed costs directly associated with the manufacturing process, such as salaries of production supervisors.

Discontinue

The process of ending the production and sale of a product or service, often due to strategic reevaluation or lack of success.