Question

An increase in interest ratesA. increases investment spending on​ machinery, equipment,​ factories, consumption spending on durable​ goods, and net exports.B. decreases investment spending on​ machinery, equipment, and​ factories, but increases consumption spending on durable goods and net exports.C. decreases investment spending on​ machinery, equipment,​ factories, consumption spending on durable​ goods, and net exports.D. decreases investment spending on​ machinery, equipment,​ factories, and consumption spending on durable​ goods, but increases net exports.

Answer 1

The correct answer is option C.

Step-by-step explanation:

An increase in the interest makes it more expensive to borrow money. In other words, the cost of borrowing increases. This will cause investment expenditure on machinery, equipment, and​ factories to decline.

Increased interest rate also increases the opportunity cost of holding money. The consumers will get more return from saving. This will reduce, the consumer spending on durable goods.

The increased interest rate will attract foreign capital inflows. The increase in demand for currency will increase its value. This will reduce exports and increase imports. As a result, net exports will decline.