Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It decreases investment spending due to higher borrowing costs
B
It increases investment spending as savings rise
C
It has no effect on investment spending
D
It decreases savings, leading to more investment
Understanding the Answer
Let's break down why this is correct
Answer
When real interest rates increase, it usually means that borrowing money becomes more expensive for businesses and individuals. Higher interest rates lead to higher costs for loans, which can make companies think twice before investing in new projects or expanding their operations. For example, if a company wants to take out a loan to build a new factory, the higher interest rate means they will have to pay back more money over time, which might discourage them from going ahead with the investment. As a result, overall investment spending in the economy tends to decrease when real interest rates rise, which can slow down economic growth. This relationship shows how interest rates play a crucial role in influencing spending and investment decisions.
Detailed Explanation
When real interest rates go up, borrowing money becomes more expensive. Other options are incorrect because Some might think that higher interest rates mean more savings, which leads to more investment; It's a common belief that interest rates don't affect spending.
Key Concepts
Real Interest Rates
Investment Spending
Aggregate Demand
Topic
Interest Rates and Economic Impact
Difficulty
easy level question
Cognitive Level
understand
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