The neoclassical model of investment says investment depends negatively on the real interest rate because an increase in the real interest rate:
A) raises the cost of capital.
B) lowers the marginal product of capital.
C) lowers the real rental price of capital.
D) slows down the speed at which net investment responds to the incentive to invest.

Question

Quizplus · Accepted Answer

The neoclassical model of investment states that investment is negatively related to the real interest rate because an increase in the real interest rate raises the cost of capital. This makes investment less profitable, leading to lower levels of investment.

The Neoclassical Model of Investment Says Investment Depends Negatively on the Real