Question : Which of the following is not true when the interest rate in the economy goes up?
Option 1: Saving increases
Option 2: Lending decreases
Option 3: Cost of production increases
Option 4: Return on capital increases
Correct Answer: Return on capital increases
Solution : The correct answer is the Return on capital increases .
On a macroeconomic level, interest rates are the primary determinant of investment. The current theory holds that if interest rates rise everywhere, investment will decline, resulting in a decline in the national income. Higher rates encourage more saving, which leads to more investment and jobs, which boosts output and profits.
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