If interest rates are rising:

a. planned investment spending is most likely to remain the same.

b. firms will increase purchases of large capital machinery and construction.

c. planned investment spending is most likely to decrease.

d. unplanned investment in inventories is likely to be negative.

e. planned investment spending is most likely to increase.

Question

Business

Dorian Powell

6 June, 19:53

If interest rates are rising:

a. planned investment spending is most likely to remain the same.

b. firms will increase purchases of large capital machinery and construction.

c. planned investment spending is most likely to decrease.

d. unplanned investment in inventories is likely to be negative.

e. planned investment spending is most likely to increase.

+3

Answers (1)

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Cullen · Answer 1

c. planned investment spending is most likely to decrease.

Explanation:

High interests rates reduce the levels of investment in an economy. Investments are capital intensive ventures and will require borrowing to finance them. When interest rates are high, loans become expensive. For a project to be viable in times of high-interest rates, it will need to have a very high rate of return.

When interest rates are high, banks will offer a higher rate of return on savings. Using savings to finance investments become more costly. Investors would prefer to put their money in a deposit account for higher interest payments than to invest.

High-interest rate thus slows down investments expenditures. The cost of borrowing goes up while the incentives to save increase.