In the short run,if the Federal Reserve reduces interest rates,
A)firms do not change their capital stock.
B)firms buy less capital and the marginal product of capital falls.
C)firms allow their capital to fully depreciate.
D)firms accumulate more inventory.
E)firms buy more capital and the marginal product of capital falls.

Question

Quizplus · Accepted Answer

When the Federal Reserve reduces interest rates, it becomes cheaper for firms to borrow money to invest in capital. This results in more capital being bought, which causes the marginal product of capital to fall due to diminishing returns.

In the Short Run,if the Federal Reserve Reduces Interest Rates