Question

Other things equal, an increase in the interest rate leads to: a. no change in the quantity of investment goods demanded. b. sometimes an increase and sometimes a decrease in the quantity of investment goods demanded. c. an increase in the quantity of investment goods demanded. d. a decrease in the quantity of investment goods demanded.

Answer 1

Option (d) is correct.

Step-by-step explanation:

Other factors remains constant, an increase in the interest rate will lead to reduce the quantity demanded for investment goods because of the higher rate of borrowings.

Higher interest rate induces the borrowers to take less loans. Hence, they have less amount of money in hand to invest in the investment goods. Therefore, this will reduce the demand for investment goods. Also, we can say that the cost of borrowing increases as a result of higher interest rate.