An increase in which of the following variables will cause an increase in the user cost of capital?
A)δ
B)Πt
C)Πᵉt
D)all of the above
E) none of the above

Question

Quizplus · Accepted Answer

The user cost of capital is calculated as (r + δ - Πᵉt) / (1 + r), where r is the interest rate, δ is the depreciation rate, and Πᵉt is the expected rate of inflation. An increase in δ will increase the numerator of this equation, resulting in a higher user cost of capital. Increases in Πt or Πᵉt will decrease the user cost of capital, so choices B and C can be eliminated. Therefore, the correct answer is A.

An Increase in Which of the Following Variables Will Cause