How does monetary policy influence business investment decisions?

• A. By dictating corporate tax rates directly.
• B. By setting wage standards for employees.
• C. By changing interest rates and money supply, affecting borrowing costs and investment activity.
• D. By controlling stock prices in the market.

Answer: (C)

Monetary policy influences business investment decisions by altering borrowing costs and the availability of money. When the central bank lowers rates or expands the money supply, borrowing becomes cheaper and liquidity is higher, making it more attractive for firms to finance new projects, equipment, or expansion. This reduces the hurdle rate for investments, so projects with expected returns that now exceed the lower overall cost of capital look more promising. If policy tightens—rates rise and money becomes scarcer—borrowing costs increase and investment can slow as financing becomes less attractive. Corporate tax rates and wage standards are set by fiscal and labor policies, not primarily by monetary policy, and stock prices are influenced by many factors, though policy expectations can affect them indirectly.