If the real interest rate increases and businesses expect that new equipment will significantly reduce their production costs in the future, then the investment share could increase, decrease, or stay the same.

Question

Quizplus · Accepted Answer

The decision to invest depends on a balance between the cost of borrowing (influenced by the real interest rate) and the expected returns on investment (such as cost savings from new equipment). If the expected returns outweigh the increased borrowing costs, investment could increase. Conversely, if the higher interest rates significantly deter borrowing more than the expected returns encourage it, investment could decrease. It's also possible that these factors balance out, leading to no change in investment levels.

If the Real Interest Rate Increases and Businesses Expect That