Question

The marginal cost of capital is determined by all of the following EXCEPT,

(a) corporate profit rate

(b) rate of depreciation

(c) interest rate

(d) price of capital and its rate of change

Firms find it profitable to add to their capital stock if,

(a) real cost of capital exceeds the marginal product of capital.

(b) marginal product of capital exceeds the real cost of capital.

(c) marginal product of capital exceeds the real interest rate.

(d) rental price of capital exceeds the marginal product of capital.

10. When the inflation rate is positive

i) Nominal GDP grows more than real GDP

ii) Nominal GDP grows less than real GDP

iii) Nominal GDP grows as much as real GDP

Answer 1

Answer 1

Option A

The marginal product of capital determines the real rental price of capital. The real interest rate, the depreciation rate, and the relative price of capital goods determine the cost of capital. According to the neoclassical model, firms invest if the rental price is greater than the cost of capital, and they disinvest if the rental price is less than the cost of capital.

Answer 2

Option b

In the neoclassical model of business fixed investment, firms will find it profitable to add to their capital stock if the marginal productivity of capital is greater than the cost of capital. .This creates an incentive to invest, because managers can raise the market value of their firms' stock by buying more capital as real rental price has also increased

Last answer

Option A

Nominal differs from real GDP in that it includes changes in prices due to inflation, which reflects the rate of price increases in an economy. Hence with positive inflation nominal gdp rises more than real gdp