Question

Theory tells us that the real interest rate equals the marginal product
of capital less the depreciation rate. Theory also tells us that the marginal
product of capital decreases when the capital-labor ratio increases. We know
from observation that the capital-labor ratio has been rising steadily for over a
century, but that the real interest rate and the depreciation rate have remained
relatively constant. How can all of these statements be correct? Explain.
Hint: One possible answer uses technological change in an important way.
Graphing the production function for different technology levels may be helpful.

Answer 1