When interest rates in a given economy are reduced, it causes firms to employ __
ID: 1199179 • Letter: W
Question
When interest rates in a given economy are reduced, it causes firms to employ __________ capital goods. In terms of the production function (graphed with labor on the horizontal axis and Real GDP on the vertical axis), this then causes ____________________ .
more; the production function to shift upward
less; the production function to shift downward
more; a movement up along a given production function
more; a movement down along a given production function
a.more; the production function to shift upward
b.less; the production function to shift downward
c.more; a movement up along a given production function
d.more; a movement down along a given production function
Explanation / Answer
Option C
With the reduction in the interest rate firm will tend to borrow more and invest in profitable projects. Thus the firm invest by employing more capital. With increase in capital the GDP rises up along the given production function. However, the production function will not shift as production functions shift either due to improvement in technology or increase in the skills of the labour or combination of both where more efficiency is achieved
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