Question

Interest-rate increases have a __________ impact on the residential home construction industry and a __________ effect on industries that produce consumer necessities such as prescription drugs or basic grocery items. A. positive; negligibleB. negative; negligibleC. negative; positiveD. positive; negative

Answer 1

B. Negative, Negligible

Step-by-step explanation:

Interest Rate is negatively related to Investment. Higher Interest Rate increases cost of investment, lower interest rate reduces cost of investment.

However, Investment in a particular sector/ industry is also defined by: Concentration of that sector in entire investment outlay & Income Elasticity of the sector's commodity demand. Implicatively, a sector with huge concentration of investment outlay & products with high income elasticity will have more Interest rate sensitive Investment and vice versa.

Construction Industry being very capital intensive has higher investment magnitude & also more Income Elastic demand. So, impact of higher interest rate will impact this industry more.

Necessity goods Industries are less capital intensive , investment concentrated & also have less Income Elastic Demand. So, impact of higher interest rate will impact this industry less.

(Demand's Income Elasticity is the responsiveness of a good's demand to change in Income. It is more in luxurious goods, less in necessity goods)