How do interest rates influence investment decisions?

Interest rates play a crucial role in shaping investment decisions, and the correct answer highlights that higher rates increase borrowing costs, thereby making investments less attractive. When interest rates rise, the cost of borrowing funds to finance investments becomes more expensive for businesses and individuals. As borrowing costs increase, potential investors may be deterred from taking on projects or expanding their operations, as the expected return on investment may no longer justify the higher cost of financing.

Additionally, higher interest rates can lead to an opportunity cost, where investors might prefer to keep their money in interest-bearing savings accounts or bonds rather than invest in riskier ventures that could yield lower returns. This shift in preference can lead to reduced capital spending, which can ultimately slow economic growth.

While the other choices hint at relevant concepts, they do not accurately capture the direct relationship between interest rates and investment decisions as effectively as the chosen answer does.