A downturn in business confidence may cause a ________ in j,and an ________ of the true user cost of capital,both depressing investment.

Question

Quizplus · Accepted Answer

A fall in business confidence would lead to a fall in investment, which would in turn depress j (the interest rate), and cause an overestimation of the true user cost of capital. This is because as investment falls, the demand for capital decreases, leading to a fall in the interest rate. However, an overestimation of the true user cost of capital would occur because even though the interest rate has fallen, businesses may perceive the risk of borrowing to be higher due to the fall in business confidence, leading to an overestimation of the actual cost of capital.

A Downturn in Business Confidence May Cause a ________ in J,and