With expected inflation equal to zero in the model, investment activity for an economy is:
A) a positive function of the nominal rate of interest.
B) a negative function of the nominal rate of interest.
C) constant in the face of differing nominal rates of interest.
D) limited to the rate of growth of nominal GDP minus the inflation rate.

Question

Quizplus · Accepted Answer

Investment activity is typically a negative function of the nominal rate of interest because as the nominal interest rate increases, the cost of borrowing funds for investment rises, leading to a decrease in investment activity.

With Expected Inflation Equal to Zero in the Model, Investment