Suppose your company is in equilibrium,with its capital stock at its desired level.A permanent decline in the real interest rate now has what effect on your desired capital stock?
A)raises it,because the future marginal productivity of capital is higher
B)lowers it,because the future marginal productivity of capital is lower
C)raises it,because the user cost of capital is now lower
D)lowers it,because the user cost of capital is now higher

Question

Quizplus · Accepted Answer

A permanent decline in the real interest rate reduces the user cost of capital, which makes it cheaper for firms to invest in new capital. As a result, the desired capital stock increases, as firms now find it more profitable to invest in additional capital.

Suppose Your Company Is in Equilibrium,with Its Capital Stock at Its