If the Return on Capital Is 12 Percent and the Price

question 134

Multiple Choice

If the return on capital is 12 percent and the price for loanable funds is 9 percent, then

• A)firms will not be willing to borrow loanable funds until either the return on capital decreases or the price for loanable funds increases, because the market for loanable funds is not in equilibrium and businesses will be wary of further investment.
• B)firms will realize that if they borrow loanable funds and invest in capital goods, it will cause the return on capital to decrease, so they won't want to borrow the funds.
• C)savers will realize that they can earn more if they invest their savings in capital, so they will withdraw their savings and supply them to firms at 14 percent.
• D)none of the above

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Definitions:

Diversification

The process of allocating investments among various financial assets to reduce risk and improve potential returns.

Diversifiable Risk

A risk that can be reduced or mitigated through the diversification of investments in a portfolio.

Government Regulation

Laws and rules established by governmental agencies aimed at controlling the way businesses can operate within the economy.

Systematic Risk

A hazard inherent to the entire market or a market segment, which diversification cannot diminish.