Question

A decrease in the interest rate results in:______.

1. a greater opportunity cost of investment and so planned investment spending increases.
2. a smaller opportunity cost of investment and so planned investment spending decreases.
3. a smaller opportunity cost of investment and so planned investment spending increases.
4. a greater opportunity cost of investment and so planned investment spending decreases.

Answer 1

3. a smaller opportunity cost of investment and so planned investment spending increases.

Step-by-step explanation:

Opportunity cost is defined as the foregone alternative when a person undertakes an activity. For example going to work is the opportunity cost of staying at home to rest.

Opportunity cost is weighed against activity to be undertaken.

In this instance the opportunity cost of investment is the alternative foregone by investors.

As interest rate decreases it makes investment attractive because the cost of doing business decreases. This make other alternatives less attractive (smaller opportunity cost).

Investment now increases.

The monetary regulation agencies use interest rate a tool to either boost or reduce investment. The higher the interest rate th lower investment, and vice versa