In the equation
,if
Is close to infinity,
A)investment is extremely sensitive to real interest rate changes.
B)investment is somewhat sensitive to changes in the marginal product of capital.
C)investment is not very sensitive to real interest rate changes.
D)investment is sensitive to tax rate changes.
E)none of the above

Question

In the equation 
,if 
Is close to infinity,
A)investment is extremely sensitive to real interest rate changes. 
B)investment is somewhat sensitive to changes in the marginal product of capital. 
C)investment is not very sensitive to real interest rate changes. 
D)investment is sensitive to tax rate changes. 
E)none of the above

Quizplus · Accepted Answer

When the denominator in the equation is close to infinity, the fraction approaches zero. Since this equation represents the elasticity of investment with respect to real interest rates, a value of zero implies that investment is extremely sensitive to changes in real interest rates. Hence, option A is the correct choice.

In the Equation