In macroeconomic investment analysis, what is the usual effect of a decline in the real interest rate on the level of investment spending?

Introduction / Context:
This question tests your understanding of how real interest rates affect planned investment in macroeconomics. In simple Keynesian and aggregate demand models, there is an inverse relationship between the real interest rate and the quantity of investment, represented by an investment demand schedule. Knowing whether a change in the interest rate causes a shift of the curve or a movement along the curve is important for correctly interpreting diagrams and policy effects.

Given Data / Assumptions:
- We are working with an investment demand curve that shows a relationship between real interest rate and quantity of investment demand.
- Other factors that affect investment, such as expectations and technology, are assumed constant in the short run.
- The real interest rate declines while the underlying investment schedule remains unchanged.

Concept / Approach:
The investment demand schedule shows, for each possible real interest rate, the amount of investment projects that are expected to be profitable. When the real interest rate falls, more projects yield a rate of return above the borrowing cost, so the quantity of investment demanded rises. This change is represented as a movement along the existing curve, not as a shift of the entire curve. Shifts occur when non interest factors such as expectations or technology change.

Step-by-Step Solution:
Step 1: Recall that a movement from one point to another on the same curve is caused by a change in the variable on the axis, here the real interest rate. Step 2: Recognise that a decline in the real interest rate makes more investment projects financially attractive. Step 3: Conclude that the quantity of investment spending increases, which is a movement down along the investment demand curve. Step 4: Option C describes exactly this increase in investment spending along the existing schedule.

Verification / Alternative check:
Draw a downward sloping investment demand curve with the real interest rate on the vertical axis and investment quantity on the horizontal axis. Mark an initial rate and quantity point. Then lower the interest rate and find the new point on the same curve. You will see that the point moves along the curve to a higher investment quantity, confirming that the schedule itself does not shift in this case.

Why Other Options Are Wrong:
Option A suggests a downward shift of the entire investment schedule, which would represent a change in non interest determinants of investment rather than a change in the rate itself. Option B similarly implies a leftward shift, meaning less investment at every interest rate, which contradicts the effect of a lower rate. Option D is wrong because option C already provides the correct description of the effect.

Common Pitfalls:
A frequent mistake is to confuse movements along a curve with shifts of the curve. Another pitfall is ignoring the difference between nominal and real interest rates; investment decisions depend on real rates, which account for inflation. Some students also think that any change in the interest rate automatically shifts the curve, but that would double count the effect and misrepresent the underlying economic relationship.

Final Answer:
The correct choice is It will increase the amount of investment spending by moving along the existing investment schedule..