Investment Expenditures

The marginal efficiency of investment effect is the basic channel for interest rate effects on investment expenditures. As financing costs decline, there is an increase in the volume of investment opportunities offering expected yields enough in excess of financing costs to justify bearing the risks involved; therefore, investment expenditures increase. Credit rationing effects, which are interest-induced, are an important supplementary channel for residential construction expenditures, Interest-induced wealth effects may be a factor in residential construction expenditures as well.

Today's economists regard consumption expenditures as inversely related to interest rates. The major channels for interest rate effects on consumption expenditures include return for saving, marginal efficiency of investment, and interest-induced wealth effects.