Income and Expenditure - Investment Spending - The Interest Rate and Investment Spending

4 important questions on Income and Expenditure - Investment Spending - The Interest Rate and Investment Spending

What is the relationship between planned investment and interest rate?

  • The higher the interest rate the less firms are going to plan to invest so there will be a low level of planned investment.
  • which means there is a negative relationship between interest rate and planned investment.
Report

When is the onliy time firms will go ahead with investment spending to projects?

  • If  those projects will give them a higher rate of return than the cost of the funds they would need to borrow to finance that project.
  • so when the interest rate rises, fewer projects will have a higher rate of return so the investment will decrease.
Report

What is the profit received from previous investments? What is the opportunity cost of using that profit to finance other projects?

  • Profits received from previous investments are called retained earnings.
  • the opportunity cost of using retained earning, is the interest forgone from being able to lend the funds, and earning interest on them
Report

Is there a difference between borrowing for a new investment project and using previous retained earnings to fund a project?

Even when there is an increase in interest rate borrowing funds to finance a project, and using retained earnings have the opportunity cost. A rise in the market interest rate is going to make a project less profitable regardless.
Report

The question on the page originate from the summary of the following study material:

  • A unique study and practice tool
  • Never study anything twice again
  • Get the grades you hope for
  • 100% sure, 100% understanding
Remember faster, study better. Scientifically proven.
Trustpilot Logo
  • Higher grades + faster learning
  • Never study anything twice
  • 100% sure, 100% understanding
Discover Study Smart