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:

Price Level

An index that measures the average of prices of goods and services in an economy, often used to evaluate inflation or deflation.

Money Demand Curve

A graphical representation showing the relationship between the quantity of money people want to hold and the interest rate, under the assumption all other factors remain constant.

Opportunity Cost

The consequence of losing possible gains from various options when one preference is made.

Interest Rate

The cost of borrowing money or the return for investing money, usually expressed as a percentage per annum.