Final answer:
This question pertains to the market for loanable funds and how changes in the interest rate affect investment decisions and the cost of financial capital for firms. It explores the relationship between the cost of borrowing and the firm's expected return, and how the supply of loanable funds can influence interest rates.
Step-by-step explanation:
The question deals with the concept of the market for loanable funds and the impact that changes in the interest rate have on investment decisions. When the interest rate is 5%, the cost of acquiring capital through borrowing is represented by this percentage. However, if the interest rate increases to 9%, then the cost of financial capital for the firm increases. The firm must then decide if it is worthwhile to invest given the higher cost of borrowing. This decision typically depends on the return the firm expects to earn from the investment. In this case, the example indicates that if the firm can still capture a 5% return to society, then their effective rate of return would be lower than the interest rate, meaning it would be a less attractive investment. By comparing different interest rates, for instance 4% and 5%, one can analyze how sensitive investment decisions are to changes in the interest rate. It is also mentioned that an increase in the amount of loanable funds generally leads to a decrease in the interest rate, due to the increased supply of funds relative to demand.