The Interest Rate Effect Predicts That Higher Prices

question 30

Multiple Choice

The interest rate effect predicts that higher prices:

• A) make it more expensive to borrow, leading to higher interest rates and less investment.
• B) make people worse off by reducing the value of their wealth, leading them to save more and spend less.
• C) increase borrowing, leading to lower interest rates and more investment.
• D) increase borrowing, leading to higher interest rates and less investment.

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Definitions:

Profitability Ratio

A class of financial metrics used to evaluate a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time.

Average Accounting Return

A financial ratio that measures the average net income a company expects to earn from an investment compared to its initial cost.

Book Value

The net value of a company's assets as recorded on the balance sheet, calculated by subtracting liabilities from the total value of assets.

Initial Investment

The amount of money used to start a business venture or project, not including operating costs or maintenance expenses incurred after the venture is operational.