How does the quantity of capital already in use affect the level of investment?
I. A greater capital stock is likely to lead to more investment since there will be more capital to replace.
II. A greater capital stock is likely to lead to less investment because further increases in the demand for investment raise the cost of capital.
III. For a given desired level of capital stock, the amount of investment needed to reach that level will be lower when the current capital stock is higher.
IV. Investment means adding new capital; the existing stock of capital does not influence additions to capital.

Question

How does the quantity of capital already in use affect the level of investment? 
I. A greater capital stock is likely to lead to more investment since there will be more capital to replace.
II. A greater capital stock is likely to lead to less investment because further increases in the demand for investment raise the cost of capital.
III. For a given desired level of capital stock, the amount of investment needed to reach that level will be lower when the current capital stock is higher.
IV. Investment means adding new capital; the existing stock of capital does not influence additions to capital.

Quizplus · Accepted Answer

A greater capital stock is likely to lead to more investment to replace worn-out capital or to expand production, but further increases in investment demand will raise the cost of capital, which may discourage investment. For a given desired level of capital stock, the amount of investment needed to reach that level will be lower when the current capital stock is higher. Existing capital is a factor that shapes the demand for new investment, so IV is incorrect.

How Does the Quantity of Capital Already in Use Affect