Investment will be more variable if the real interest rate is
A)more variable and future total factor productivity is more variable.
B)less variable and future total factor productivity is less variable.
C)more variable and future total factor productivity is less variable.
D)less variable and future total factor productivity is more variable.
E)constant with total factor productivity.

Question

Quizplus · Accepted Answer

Investment tends to be more variable when the real interest rate is more variable because changes in the interest rate affect the cost of borrowing and, consequently, investment decisions. Similarly, if future total factor productivity (TFP) is more variable, it introduces uncertainty about future returns on investment, making investment more variable as firms adjust to new information about future productivity.

Investment Will Be More Variable If the Real Interest Rate