Question

Firms may invest in fewer projects as a result of A. an increase in interest rates that increase economic growth. B. an increase in interest rates that decrease economic growth. C. a decrease in interest rates that increase economic growth. D. a decrease in interest rates that decrease economic growth. E. an increase in dividends that limit economic growth.

Answer 1

Answer: B. an increase in interest rates that decrease economic growth.

Explanation:

If interest rates were to rise in an Economy, that would mean that the cost of borrowing just rose. The rise in the Cost of Borrowing reduces consumer spending as well as business investment. This will therefore lead to a lower Aggregate demand. A lower AD in the Economy usually leads to a decrease in economic growth.

Now, if such things were to happen, a firm may definitely invest in fewer projects because first off it will be more expensive for them to borrow and invest because of the high rates. They will also be discouraged because of the Decrease in economic growth as the chances of their projects doing well will be drop in a depreciating economy.