"Profit-maximizing firms will reduce their desired investment when the interest rate rises, other things being equal....
"Profit-maximizing firms will reduce their desired investment when the interest rate rises, other things being equal. As a result, empirical economists should always expect to see a negative correlation between actual investment and the interest rate." Comment.
Homework Answers
I think this is right.
A rise in interest rate would increase the cost of borrowing of firms. Therefore, they would borrow less and invest less. Therefore, there would be a negative correlation between real interest and investment.
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