Multiple Choice QuestionAn increase in real interest rates will ______ investment spending and ______ aggregate demand.Multiple choice question.lower; reducelower; increaseraise; reduceraise; increase
Question
Multiple Choice QuestionAn increase in real interest rates will ______ investment spending and ______ aggregate demand.Multiple choice question.lower; reducelower; increaseraise; reduceraise; increase
Solution
The correct answer is "lower; reduce".
Here's why:
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Real interest rates refer to the interest rates that have been adjusted to remove the effects of inflation. When real interest rates increase, it becomes more expensive for businesses and consumers to borrow money.
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Investment spending is the amount of money spent by businesses on capital goods. When borrowing becomes more expensive due to higher real interest rates, businesses are less likely to invest in new capital goods. Therefore, an increase in real interest rates will lower investment spending.
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Aggregate demand is the total demand for goods and services within an economy. It is influenced by many factors, including investment spending. When investment spending decreases, aggregate demand also decreases. Therefore, an increase in real interest rates will reduce aggregate demand.
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