A fall in the real interest rate is most likely to increase business investment because it
Correct answer: A. Reduces the cost of borrowing for capital projects
- A. Reduces the cost of borrowing for capital projects
- B. Raises the cost of purchasing machinery
- C. Reduces expected returns on productive assets
- D. Makes household saving legally compulsory
Explanation
The real interest rate represents the inflation-adjusted cost of borrowing. When it falls, more investment projects become profitable because their financing cost is lower.
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About Macroeconomics
The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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