In the short run, because financial markets do not respond immediately to interest rate changes:
A) prices are very volatile
B) the marginal product of capital always is greater than the real interest rate
C) the marginal product of capital never deviates to the real interest rate
D) the marginal product of capital deviates from the real interest rate
E) investment is less volatile than output

Question

Quizplus · Accepted Answer

In the short run, the marginal product of capital may deviate from the real interest rate due to financial market frictions and other factors that may affect investment decisions. These frictions can cause prices to be volatile and investment to be less responsive to changes in interest rates than in the long run. Therefore, D is the correct answer.

In the Short Run, Because Financial Markets Do Not Respond