Question

The change from a straight to a kinked capital allocation line is a result of:

A) Increased Market Demand
B) Changing Interest Rates
C) Shifts in Consumer Preferences
D) Government Regulations

Answer 1

The change from a straight to a kinked capital allocation line is a result of changing interest rates.

Step-by-step explanation:

The change from a straight to a kinked capital allocation line is a result of changing interest rates.

1. When interest rates rise, the expected return on investment decreases, causing investors to demand a higher return to compensate for the increased risk. This leads to a decrease in the quantity of investment and a kinked capital allocation line.
2. Conversely, when interest rates decrease, the expected return on investment increases, making the quantity of investment increase, and the capital allocation line becomes straight.

Therefore, the correct answer is B) Changing Interest Rates.