When saving increases as the interest rate increases, what effect does an increase in investment demand have on interest rates and the quantity of investment?

An increase in investment demand typically leads to higher interest rates, as more businesses seek to borrow funds for investment projects. When investment demand rises, lenders increase the cost of borrowing (the interest rate) because they can lend their funds at a higher price due to the increased competition for these funds.

With higher interest rates, the cost of financing investments becomes more expensive for businesses. However, when saving increases as the interest rate rises, it means that more funds are being put into the financial system, making more capital available for investment. Thus, while the interest rate is higher, the increase in available savings can offset some of the cost of financing for businesses.

This scenario allows businesses to still pursue investment opportunities. Higher interest rates can signal a growing economy, which typically enhances the expected returns on new investments. Consequently, despite the higher borrowing cost, the total quantity of investment can still increase, as firms are willing to invest when they expect adequate returns.

Therefore, the context of increased investment demand along with the increase in savings leads to a situation where not only do interest rates rise, but firms also respond to anticipated economic growth and potential profitability by increasing the actual quantity of investment they undertake.