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7 votes
how is it possible for investment spending to increase even in a period in which the real interest rate rises? please make up numbers to explain it!

User DBug
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1 Answer

23 votes
23 votes

It is possible for investment spending to increase even in a period in which the real interest rate rises because the real interest rate is just one factor that influences investment decisions. Other factors, such as expected future profits, the availability of financing, and the perceived risk of the investment, can also play a role.

For example, suppose that the real interest rate rises from 5% to 7% over a certain period of time. At the same time, the expected future profits of a particular investment project increase significantly, perhaps due to new technology or a change in market conditions. In this case, the increased expected profits might outweigh the higher cost of borrowing, making the investment still attractive to potential investors. As a result, investment spending could still increase, even though the real interest rate has risen.

Alternatively, if the availability of financing improves, it might be easier for companies to secure the funds they need to make investments, even if the real interest rate is higher. This could also lead to increased investment spending.

In summary, while the real interest rate is an important factor in investment decisions, it is not the only factor, and it is possible for investment spending to increase even in a period in which the real interest rate rises.

User Lcharbon
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