Inventory investment, at least in theory, should:
A) rise when the real interest rate rises, other things being equal.
B) not depend on the real interest rate, other things being equal.
C) fall when the real interest rate rises, other things being equal.
D) depend only on the change in real GDP.

Question

Quizplus · Accepted Answer

According to the theory of inventory investment, when the real interest rate rises, the cost of holding inventories increases, leading to a lower incentive for businesses to hold inventories. As a result, businesses may reduce their inventories, leading to a reduction in inventory investment. Therefore, inventory investment should fall when the real interest rate rises, other things being equal.

Inventory Investment, at Least in Theory, Should