As the real interest rate decreases, the cost of investment decreases. A lower cost encourages firms to demand more money for investment purposes and increase their production level. This would raise their expected return on investment. A higher expected rate of return stimulates the investment demand in the economy.
See Also
How interest rates affect your investmentsDo Changes in Interest Rates Affect Consumer Spending?The investment demand is negatively sloped, as shown in the graph below:
![Q3. Why will a reduction in the real... [FREE SOLUTION] (1)](https://i0.wp.com/s3.eu-central-1.amazonaws.com/studysmarter-mediafiles/media/textbook-exercise-images/image_KnOAawU.png?X-Amz-Algorithm=AWS4-HMAC-SHA256&X-Amz-Credential=AKIA4OLDUDE42UZHAIET%2F20240916%2Feu-central-1%2Fs3%2Faws4_request&X-Amz-Date=20240916T223100Z&X-Amz-Expires=604800&X-Amz-SignedHeaders=host&X-Amz-Signature=c4c9fe6e84489a3cfc62acfee6f9c32adb4e9504341256c27f0f39957f37b8b8 "Q3. Why will a reduction in the real... [FREE SOLUTION] (1)")
When the real interest rate declines, the increasing investment is shown by the negatively sloped investment demand curve, ID0. Therefore, a decrease in the real interest rate increases investment spending, ceteris paribus.
![Q3. Why will a reduction in the real... [FREE SOLUTION] (2024)](data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAAEAAAABCAQAAAC1HAwCAAAAC0lEQVR42mP8/h8AAvMB+NzmkbcAAAAASUVORK5CYII=)
