An increase in the default premium
A)lowers the real interest rate and firms invest more.
B)shifts the optimal investment schedule to the right.
C)shifts the optimal investment schedule to the left.
D)will prevent firms from defaulting on their loans.
E)raises the safe credit market interest rate.

Question

Quizplus · Accepted Answer

An increase in the default premium means that lenders perceive more risk in lending to firms, which leads to higher borrowing costs for these firms. As a result, firms will reduce their investments as the cost of borrowing has become more expensive, which shifts the optimal investment schedule to the left.

An Increase in the Default Premium