Question

How does the opportunity cost principle explain the relationship between the real interest rate and investment spending?
As the interest rate rises,
the more spending businesses want to do.
the less attractive it is to leave money in the bank instead of spending on investments.
the more attractive it is to leave money in the bank instead of spending on investments.
it has no effect on investment spending. If firms need to expand, they will invest regardless of the interest rate.
b. The investment line is
because of the relationship between real interest rates and investment
spending
perfectly elastic
vertical
upward-sloping
downward-sloping

Answer 1

The opportunity cost illustrates the relationship that exists between them because as the interest rate rises, the more attractive it is to leave money in the bank instead of spending on investments.

The investment line is downward sloping because of the relationship between real interest rates and investment spending.

Opportunity cost simply means what one foregoes in order to get something else. It should be noted that when there's an increase in the interest rate, this will lead, the cost of borrowing will be high. Therefore, there'll be a reduction in investment.

Therefore, there's a negative relationship between interest rate and investment spending. This then leads to a downward-sloping curve.

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