Other things equal, an increase in the equilibrium interest rate will
A) increase R&D spending.
B) rise when the supply of loanable funds increases.
C) decrease purchases of capital goods and reduce R&D spending.
D) increase bank lending.

Question

Quizplus · Accepted Answer

An increase in the equilibrium interest rate will increase the cost of borrowing, which will reduce purchases of capital goods and reduce R&D spending. This is because higher interest rates increase the cost of debt financing, making it more expensive for firms to invest in capital and R&D. As a result, they may reduce these investments, which would decrease purchases of capital goods and R&D spending. The other choices are incorrect because they do not describe the relationship between interest rates and R&D spending.

Other Things Equal, an Increase in the Equilibrium Interest Rate