Which of the following statements is correct? An increase in the real interest r
ID: 1121885 • Letter: W
Question
Which of the following statements is correct?
An increase in the real interest rate (r) will, ceteris paribus, increase the rental rate of machines (capital); this will prompt firms to decrease their capital usage.
An increase in the real interest rate (r) will, ceteris paribus, increase the rental rate of machines (capital); this will prompt firms to increase their capital usage.
An increase in the real interest rate (r) will, ceteris paribus, decrease the rental rate of machines (capital); this will prompt firms to increase their capital usage.
All of the above.
a.An increase in the real interest rate (r) will, ceteris paribus, increase the rental rate of machines (capital); this will prompt firms to decrease their capital usage.
b.An increase in the real interest rate (r) will, ceteris paribus, increase the rental rate of machines (capital); this will prompt firms to increase their capital usage.
c.An increase in the real interest rate (r) will, ceteris paribus, decrease the rental rate of machines (capital); this will prompt firms to increase their capital usage.
d.All of the above.
Explanation / Answer
A decrease in the real interest rate, other things remaining constant, will decrease the rental rate of machines or capital. The reason behind is that the the fall in interest rate, which is an implicit or opportunity cost foe the machine or capital, will reduce the price of the capital. The capital has now become relatively less expensive and will lead to firms using more and more of capital.
The correct option therefore is C.
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