In the new Keynesian view, an increase in the real interest rate would cause firms to
A)increase their spending on plant and equipment.
B)increase the wages they pay their employees.
C)reduce their inventory holdings.
D)increase their reliance on borrowed funds.

Question

Quizplus · Accepted Answer

In the new Keynesian view, an increase in the real interest rate would cause firms to reduce their inventory holdings. This is because the opportunity cost of holding inventories increases as the real interest rate rises. Firms would therefore reduce their inventory holdings to minimize their cost of holding inventories.

In the New Keynesian View, an Increase in the Real