If a large decrease in the cost of capital leads to a firm increasing the labor it uses

Question

Quizplus · Accepted Answer

A decrease in the cost of capital leads to a substitution effect where firms replace labor for capital. However, if the cost decrease is significant, the output effect of increasing labor may outweigh the substitution effect, leading to an overall increase in labor usage. Therefore, the output effect outweighs the substitution effect.

If a Large Decrease in the Cost of Capital Leads