If the current level of output in the economy is $10 trillion a year, the current year's capital stock in the economy is $25 trillion, the savings rate is 20 percent and the rate of depreciation of capital stock is 3 percent, next year's capital stock will be _______.
A) $26.25 trillion
B) $27 trillion
C) $27.25 trillion
D) $27.75 trillion

Question

Quizplus · Accepted Answer

The next year's capital stock is calculated by adding this year's savings (investment) to the current capital stock and then subtracting depreciation. Savings are 20% of $10 trillion = $2 trillion. Depreciation is 3% of $25 trillion = $0.75 trillion. So, next year's capital stock = $25 trillion + $2 trillion - $0.75 trillion = $26.25 trillion.

If the Current Level of Output in the Economy Is