When interest rates fall in a given economy,it causes firms to borrow __________ funds used for purchasing capital goods.The result will be a(n)___________ in the level of capital employed in the economy.In terms of the production function (graphed with labor on the horizontal axis and Real GDP on the vertical axis),this then causes ____________________ which makes the LRAS curve shift ____________ resulting in ______________________.
A) more; increase; the production function to shift upward; rightward; economic growth
B) less; decrease; the production function to shift downward; leftward; a shrinking economy
C) more; increase; a movement up along a given production function; rightward; economic growth
D) more; increase; a movement down along a given production function; leftward; a shrinking economy

Question

Quizplus · Accepted Answer

When interest rates fall, firms are motivated to borrow more funds to purchase capital goods. As a result, the level of capital employed in the economy increases, which causes the production function to shift upward. This shift in the production function shifts the LRAS curve rightward, resulting in economic growth. The other choices are incorrect because they either imply a decrease in the amount of borrowing and capital employed or a movement down along the production function, which does not make sense in this context.

When Interest Rates Fall in a Given Economy,it Causes Firms