A reduction in which of the following variables will cause a reduction 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 calculated as (rt + δ - Πt)/(1-Πᵉt), where rt is the nominal interest rate, δ is the rate of depreciation, Πt is the expected inflation rate, and Πᵉt is the expected inflation rate over the life of the capital asset. A reduction in rt will directly reduce the numerator of the equation, thereby reducing the user cost of capital. A reduction in Πt or Πᵉt will have an indirect effect on the user cost of capital through their impact on rt, so they are not the best choice(s) for this question.

A Reduction in Which of the Following Variables Will Cause