Interest rates affect investment spending and,as a result,the steady-state capital stock.I: An increase in interest rates lowers the steady-state capital stock.II: With a Cobb-Douglas production function,the higher is the capital-share parameter,the bigger is the change in the steady-state capital stock.

Question

Quizplus · Accepted Answer

An increase in interest rates raises the cost of borrowing, reducing investment spending and thus lowering the steady-state capital stock. With a Cobb-Douglas production function, a higher capital-share parameter means capital has a larger role in production, amplifying changes in the steady-state capital stock.

Interest Rates Affect Investment Spending And,as a Result,the Steady-State Capital