An increase in interest ratesA. increases investment spending on machinery, equipment, factories, consumption spending on durable goods, and net exports. B. decreases investment spending on machinery, equipment, and factories, but increases consumption spending on durable goods and net exports. C. decreases investment spending on machinery, equipment, factories, consumption spending on durable goods, and net exports. D. decreases investment spending on machinery, equipment, factories, and consumption spending on durable goods, but increases net exports.

Question

Libby Benson

Business

9 December, 12:01

An increase in interest ratesA. increases investment spending on machinery, equipment, factories, consumption spending on durable goods, and net exports. B. decreases investment spending on machinery, equipment, and factories, but increases consumption spending on durable goods and net exports. C. decreases investment spending on machinery, equipment, factories, consumption spending on durable goods, and net exports. D. decreases investment spending on machinery, equipment, factories, and consumption spending on durable goods, but increases net exports.

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Answers (1)

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Levi Cardenas · Answer 1

The correct answer is option C.

Explanation:

An increase in the interest makes it more expensive to borrow money. In other words, the cost of borrowing increases. This will cause investment expenditure on machinery, equipment, and factories to decline.

Increased interest rate also increases the opportunity cost of holding money. The consumers will get more return from saving. This will reduce, the consumer spending on durable goods.

The increased interest rate will attract foreign capital inflows. The increase in demand for currency will increase its value. This will reduce exports and increase imports. As a result, net exports will decline.