Which of the following statements is correct? An increase in the real interest r
ID: 1121871 • Letter: W
Question
Which of the following statements is correct?
An increase in the real interest rate (r) will, ceteris paribus, increase the rental rate of machines (capital); this will prompt firms to decrease their capital usage.
An increase in the real interest rate (r) will, ceteris paribus, increase the rental rate of machines (capital); this will prompt firms to increase their capital usage.
An increase in the real interest rate (r) will, ceteris paribus, decrease the rental rate of machines (capital); this will prompt firms to increase their capital usage.
All of the above.
a.An increase in the real interest rate (r) will, ceteris paribus, increase the rental rate of machines (capital); this will prompt firms to decrease their capital usage.
b.An increase in the real interest rate (r) will, ceteris paribus, increase the rental rate of machines (capital); this will prompt firms to increase their capital usage.
c.An increase in the real interest rate (r) will, ceteris paribus, decrease the rental rate of machines (capital); this will prompt firms to increase their capital usage.
d.All of the above.
Explanation / Answer
The right answer is option a. An increase in the real interest rate (r) will, ceteris paribus, increase the rental rate of machines (capital); this will prompt firms to decrease their capital usage.
Explanation: An increase in the real interest rate will increase the rental rate of machines (capital). Therefore, (machines) capital becomes a more expensive input. This is the reason firms would like to decrease the usage of machines (capital.)
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