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An increase in the market rate of interest causes: a
An increase in the market rate of interest causes:
a. a leftward shift in the demand for capital curve.
b. a rightward shift in the demand for capital curve.
c. a movement up the demand for capital curve.
d. a movement down the demand for capital curve.
Expert Solution
The answer is c.
The demand for capital is a function of interest rate (the rental price of capital). The higher then interest rate, the lower the quantity demanded for capital because capital is more expensive now. In other words, the demand for capital curve is downward sloping.
In this case, a change in interest rate constitutes a movement along the demand curve. Since the demand curve is downward sloping, an increase in interest rate reduces quantity demanded for capital, and hence represents movement up the demand curve.
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