An Increase in the Interest Rate

question 65

Multiple Choice

An increase in the interest rate:

• A) reduces planned investment, because the interest rate is the cost of borrowing to finance investment projects.
• B) increases planned investment, because people who make money from interest have more money to invest.
• C) has no effect on investment.
• D) may be caused by a drop in investment demand.

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Definitions:

Investment

The method of apportioning capital with the expectation of financial returns or earnings.

Standard Deviation

A statistical measure that quantifies the variability or dispersion of a set of data points or returns of an investment.

Annual Returns

The percentage change in the value of an investment over a one-year period.

Risk Premium

The extra return expected by an investor for holding a risky asset, compared to a risk-free asset.