Final answer:
Monetary policy influences investment expenditure when interest rates increase through several channels. Higher interest rates make borrowing more expensive for businesses, reducing their investment expenditure. Additionally, increased interest rates can lead to a decrease in the availability of credit for businesses, further reducing investment expenditure.
Step-by-step explanation:
Monetary policy influences investment expenditure when interest rates increase through several channels. When the central bank increases interest rates as part of a contractionary monetary policy, it becomes more expensive for businesses to borrow money for investment.
This leads to a decrease in investment expenditure. Higher interest rates also make it less attractive for consumers to borrow money for big-ticket items, such as houses and cars, which further reduces investment expenditure.
One channel through which monetary policy influences investment expenditure is the cost of borrowing. When interest rates increase, businesses face higher interest expenses when they borrow money to invest in new projects or expand their operations.
This can make these investments less profitable and discourage businesses from undertaking them. Thus, higher interest rates can lead to a decrease in investment expenditure.
Another channel through which monetary policy affects investment expenditure is the availability of credit. When interest rates increase, banks and other financial institutions may tighten their lending standards and reduce the amount of credit available to businesses.
This reduces the ability of businesses to finance investment projects, which can also lead to a decrease in investment expenditure.