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

Question

Quizplus · Accepted Answer

The user cost of capital is given by (rt + δ - Πᵉt), where rt is the nominal interest rate, δ is the rate of depreciation, and Πᵉt is the expected rate of inflation. Thus, an increase in rt will directly increase the user cost of capital. An increase in Πt or Πᵉt may indirectly affect the user cost of capital through its impact on the nominal interest rate. However, it is not a direct cause of an increase in the user cost of capital. So, both options B) and C) are not correct. Therefore, the best choice is A) rt.

An Increase in Which of the Following Variables Will Cause