Other things being equal, the neoclassical model of investment predicts that net investment will increase when the:
A) marginal product of capital falls.
B) price of new capital goods rises.
C) real interest rate falls.
D) depreciation rate rises.

Question

Quizplus · Accepted Answer

According to the neoclassical model of investment, the real interest rate plays a significant role in determining the level of investment. A fall in the real interest rate will reduce the cost of borrowing to invest in new capital goods, which in turn will increase net investment. On the other hand, a rise in the real interest rate will increase the cost of borrowing and discourage investment. Therefore, option C is the best choice.

Other Things Being Equal, the Neoclassical Model of Investment Predicts