When interest rates in a given economy are reduced,it causes firms to employ __________ capital goods.In terms of the production function (graphed with labor on the horizontal axis and Real GDP on the vertical axis),this then causes ____________________ .
A) more; the production function to shift upward
B) less; the production function to shift downward
C) more; a movement up along a given production function
D) more; a movement down along a given production function

Question

Quizplus · Accepted Answer

When interest rates are reduced, firms can borrow more easily and cheaply, which leads to an increase in investment in capital goods. This results in an upward shift of the production function, as more capital goods are available to complement labor, leading to an increase in Real GDP. Option A correctly reflects this relationship between interest rates, capital goods, and the production function.

When Interest Rates in a Given Economy Are Reduced,it Causes