If the interest rate on a loan is lower than the expected return from an investment,
A) a rational firm will take out a loan for the investment.
B) the Federal Reserve will conduct contractionary monetary policy.
C) a rational firm will not take out a loan for the investment.
D) the Federal Reserve will conduct expansionary monetary policy.
E) the government will conduct expansionary fiscal policy.

Question

Quizplus · Accepted Answer

A rational firm will take out a loan for the investment because the expected return from the investment is greater than the cost of borrowing the loan. This is known as the "opportunity cost of capital" and is a key factor in investment decision-making. Therefore, it makes sense for the firm to take out a loan and invest the funds to earn a higher return.

If the Interest Rate on a Loan Is Lower Than