According to the neoclassical model of investment, the immediate impact of a rise in the real interest rate will be to:
A)increase the cost of capital, the rental price of capital, and the rate of investment.
B)increase the cost of capital and the rental price of capital, but to lower the rate of investment.
C)increase the rental price of capital and the rate of investment, but to leave the cost of capital unchanged.
D)increase the cost of capital and lower the rate of investment, but to leave the rental price of capital

Question

Quizplus · Accepted Answer

According to the neoclassical model of investment, an increase in the real interest rate leads to a higher cost of capital (as borrowing becomes more expensive), and a lower rate of investment (as it becomes less profitable to invest in capital projects). However, the rental price of capital (the return on investment) is assumed to remain unchanged in the short run, as it depends on market conditions such as the level of demand for goods and services. Therefore, option D is the correct answer.

According to the Neoclassical Model of Investment, the Immediate Impact