The neoclassical theory of investment says both real interest rates and taxes are important determinants of investment.

Question

Quizplus · Accepted Answer

The neoclassical theory of investment argues that investment is determined by the equilibrium between the expected marginal product of capital and the cost of borrowing funds to finance that capital. Real interest rates affect the cost of borrowing funds while taxes affect the return on investment, and thus both are important determinants of investment.

The Neoclassical Theory of Investment Says Both Real Interest Rates