An increase in the real interest rate will cause
A)the expected profit of firms to rise.
B)the purchase price of capital to decrease.
C)the stock prices to rise.
D)Tobin's q to decline.

Question

Quizplus · Accepted Answer

A higher real interest rate makes investment more expensive, which in turn reduces the incentive for firms to invest in new capital projects. This reduces Tobin's q, which measures the ratio of the market value of a company's assets to their replacement cost. Therefore, an increase in the real interest rate will cause Tobin's q to decline.

An Increase in the Real Interest Rate Will Cause