When the expected real rate of interest declines, ceteris paribus, we expect:
A) more investment projects will be undertaken.
B) lenders will need to lower their average default rate to maintain their profit margins.
C) firms will borrow less and cut back on their investment projects.
D) individuals will steer clear of equity markets.

Question

Quizplus · Accepted Answer

When the expected real rate of interest declines, it becomes cheaper to borrow money. This incentivizes firms to undertake more investment projects as borrowing costs have decreased. This also makes it easier for borrowers to obtain funding for their investment projects. Hence, we expect more investment projects will be undertaken.

When the Expected Real Rate of Interest Declines, Ceteris Paribus