If the real interest rate is less than the marginal product of capital, firms are better off:
A) producing at a loss.
B) saving their earnings in an economywide financial market.
C) accumulating more inventory.
D) borrowing in financial markets and buying more capital.
E) using more imported intermediate goods.

Question

Quizplus · Accepted Answer

If the real interest rate is less than the marginal product of capital, it means that borrowing in financial markets to buy more capital would result in a positive return since the expected return on investment is higher than the cost of borrowing. Therefore, firms would be better off borrowing in financial markets and buying more capital.

If the Real Interest Rate Is Less Than the Marginal