Investment and Real Rate of Interest

There is an inverse relationship between the volume of investment and the real rate of interest. The real rate of interest is equal to the nominal (money) rate of interest minus the expected rate of inflation. Other things being equal, a higher real rate of interest, which results in a higher cost of borrowing money for investment leads to a lower amount of desired investment. A fall in interest rate and the consequent reduced cost of borrowing funds leads to higher amount of investment.