Question

What causes the interest rate to affect the level of investment spending?

1) Government policies
2) Consumer spending
3) Business profits
4) Exchange rates

Answer 1

Expectations of future profits and interest rates are key factors that affect the level of investment spending. Businesses make investment decisions based on their expectations for future profits. Lower interest rates stimulate investment, while higher interest rates reduce it.

Step-by-step explanation:

Expectations of future profits and interest rates play a significant role in determining the level of investment spending. When businesses expect an economy to grow, they perceive a growing market for their products, which encourages new investment. Lower interest rates stimulate investment spending, while higher interest rates reduce it. For example, during the second half of the 1990s in the US, investment levels surged when the economy was expected to grow, but investment levels quickly sank during a recession.