Other things equal, if the real interest rate falls and business taxes rise,
A) investment will rise until it is equal to saving.
B) we will be uncertain as to the resulting change in investment.
C) we can be certain that investment will rise.
D) we can be certain that investment will fall.

Question

Quizplus · Accepted Answer

A decrease in the real interest rate tends to encourage investment because borrowing costs are lower, making it cheaper for businesses to finance new projects. However, an increase in business taxes can discourage investment because it reduces after-tax profits. These two effects work in opposite directions, making the net effect on investment uncertain without more information.

Other Things Equal, If the Real Interest Rate Falls and Business