Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Higher interest rates encourage more investment due to increased returns.
B
Lower interest rates discourage investment due to decreased profitability.
C
Higher interest rates discourage investment as borrowing costs increase.
D
Changes in interest rates have no effect on investment decisions.
Understanding the Answer
Let's break down why this is correct
Answer
In the loanable funds market, interest rates play a crucial role in how firms decide to invest. When interest rates are low, borrowing money becomes cheaper for businesses, which encourages them to take out loans for new projects or expansions. For example, if a company wants to build a new factory, lower interest rates mean they will pay less in interest over time, making the investment more appealing. Conversely, if interest rates rise, borrowing costs increase, and firms may delay or reduce their investments because the higher costs can cut into their profits. Therefore, changes in interest rates directly influence how much firms are willing to invest in their growth and development.
Detailed Explanation
When interest rates go up, it costs more to borrow money. Other options are incorrect because Some might think higher interest means more profit, but it actually raises costs; Lower interest rates do not discourage investment; they encourage it.
Key Concepts
loanable funds
investment decisions
Topic
Loanable Funds Market Dynamics
Difficulty
medium level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.