Based on the neoclassical theory of investment,which aspect of a booming economy helps to explain the procyclicality of investment?
A)Tax revenues are likely to be rising.
B)The real interest rate is likely to be rising.
C)Capital goods are becoming more expensive.
D)Financing constraints are likely to be relaxed for many businesses.

Question

Quizplus · Accepted Answer

According to neoclassical theory, investment is procyclical because during a booming economy, financing constraints are relaxed for many businesses. This means that businesses are more likely to have access to capital to invest and expand their operations. As a result, they are more likely to invest in capital goods, which drives up the demand for those goods and makes them more expensive (option C). Tax revenues may be rising (option A) but this doesn't necessarily affect investment behavior. The real interest rate may be rising (option B) but this would likely have a dampening effect on investment rather than a procyclical one.

Based on the Neoclassical Theory of Investment,which Aspect of a Booming