Firm investment depends most strongly on which of the following?
A) The federal funds rate
B) The long-term nominal interest rate
C) The inflation rate
D) The long-term real interest rate

Question

Quizplus · Accepted Answer

The long-term real interest rate is the most important factor affecting firm investment. This is because it represents the cost of borrowing adjusted for inflation, and reflects the true opportunity cost of investing. A higher real interest rate means that borrowing is more expensive, and therefore firms may be more hesitant to invest because the returns may not be worth the cost.

Firm Investment Depends Most Strongly on Which of the Following