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

Question

Quizplus · Accepted Answer

When the Federal Reserve reduces interest rates, firms are more likely to borrow money to buy capital because it is cheaper to do so. This causes an increase in demand for capital goods, which leads to higher capital prices and lower marginal productivity of capital. Therefore, Option E is the correct answer.

In the Short Run, If the Federal Reserve Reduces Interest