According to the neoclassical model of investment, the immediate impact of a rise in the real interest rate will be to:
A) increase the cost of capital, the rental price of capital, and the rate of investment.
B) increase the cost of capital and the rental price of capital, but to lower the rate of investment.
C) increase the rental price of capital and the rate of investment, but to leave the cost of capital unchanged.
D) increase the cost of capital and lower the rate of investment, but to leave the rental price of capital unchanged.

Question

Quizplus · Accepted Answer

According to the neoclassical model of investment, a rise in the real interest rate will increase the cost of capital, which will discourage investment and lower the rate of investment. However, the rental price of capital, which is the return earned by capital owners, will remain unchanged in the short run. Therefore, the correct answer is D, which states that the cost of capital will increase and the rate of investment will lower, but the rental price of capital will remain unchanged.

According to the Neoclassical Model of Investment, the Immediate Impact