Suppose that the value of the capital stock in the economy is $150 million.If investment is equal to zero,then
A) output will remain at its current level.
B) the capital stock will decline in value but output will remain the same.
C) the capital stock will decline in value and output will move down along the production function to a new lower level of output.
D) the capital stock will decline in value and the production function will shift down as output falls.
E) firms will hire more labor to compensate for the lack of investment and output will remain the same.

Question

Quizplus · Accepted Answer

Investment is an important determinant of the capital stock and therefore output in the economy. With zero investment, the capital stock will gradually decline in value due to depreciation and wear and tear. As a result, firms will have less capital to work with, causing a decline in output. Without investment, the economy cannot maintain the level of capital it currently possesses, which will lead to a decline in output along the production function. Therefore, the correct answer is C.

Suppose That the Value of the Capital Stock in the Economy