Question

Which of the following factors would be most likely to lead to an increase in interest rates in the economy?
a. The Federal Reserve decides to try to stimulate the economy.
b. There is a decrease in expected inflation.
c. Households reduce their consumption and increase their savings.
d. Most businesses decide to modernize and expand their manufacturing capacity, and to install new equipment to reduce labor costs.
e. The economy falls into a recession.

Answer 1

Answer:

The correct answer is option d.

Explanation:

When businesses decide to modernize and expand their manufacturing capacity and to install new equipment, they will need capital in order to do so. This decision by businesses will thus lead to an increase in investment demand. As the demand curve shifts to the right, the interest rate will increase.

So, option d is the correct answer.