Everything else held constant,when financial frictions increase,the real cost of borrowing ________ so that planned investment spending ________ at any given inflation rate.
A)increases;falls
B)decreases;falls
C)decreases;rises
D)increases;rises

Question

Quizplus · Accepted Answer

Financial frictions increase the cost of borrowing, leading to higher interest rates. This, in turn, makes investment spending more expensive, causing firms to reduce planned investment spending. Therefore, the real cost of borrowing increases, and planned investment spending falls.

Everything Else Held Constant,when Financial Frictions Increase,the Real Cost of Borrowing