An increase in interest rates A) Decreases investment spending on machinery, equ

Question

An increase in interest rates
A) Decreases investment spending on machinery, equipment and factories, but increases consumption spending on durable goods and net exports
B) Decreases investment spending on machinery, equipment and factories, and consumption spending on durable goods, but increases net exports
C) Decreases investment spending on machinery,equipment and factories, consumption spending o durable goods, and net exports
D) Increases investment spending on machinery, equipment and factories, consumption spending durable goods, and net exports

I think the answer is B, but I am definitely not sure.

Also, this T/F Question is throwing me off

The Fed has more control over open market operations as compared to discount policy. True or False.

If I had to guess I would say true....?

ANY HELP IS VERY MUCH APPRECIATED

Explanation / Answer

An Increase in interest rates would results decreases investment spending on machinery, equipment and factories and consumption spending on durable goods, but increases net exports.

Most economists believe that interest rates are a major determinant of investment. When interest rates go up, investment falls. This is because higher interest rates increase the cost of capital, which is just a firm’s cost to put capital in its place. The most obvious reason for the link between interest rates and investment is that firms may borrow funds to undertake investment. Many investment projects are quite large, so that firms may not have the money to finance them without getting loans from external sources. The interest rate is the "price" of borrowed money. Thus, higher interest rates raise the cost of capital and reduce investment. This process creates a channel through which monetary policy influences the economy.

Hence, the right Option is (b) Decreases investment spending on machinery, equipment and factories and consumption spending on durable goods, but increases net exports.

The Fed has more control over open market operations as compared to discount policy is "True".

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