Question

1. "If firms expect future profits to be higher, they will respond by"

   		increasing investment and driving up interest rates
   		increasing investment and driving down interest rates
   		decreasing investment and driving up interest rates
   		decreasing investment and driving down interest rates

Answer 1

Answer. (a) increasing investment and driving up interest rates

Explanation: If firms expect future profits to be higher, they will want to produce more of their. good/service. More profit could be due to many reasons, like increase in demand, etc. So to increase production, they will need to increase investment in their plants, buy more raw materials, hire more staff, etc. Since many investors won't have all the money right now, they will approach banks to take loan. Now many such investors will approach banks since all of them expect to make more money in the future. Thus since the banks have limited amount of money to lend, they will have to increase interest rates to filter out borrowers who are willing to pay more interest.