An increase in which of the following variables will cause an increase in the user cost of capital?

Question

Quizplus · Accepted Answer

The user cost of capital is given by the formula (r + δ − Π) / (1 − Πe). An increase in rt (the real interest rate) would increase the numerator of the formula, leading to an increase in the user cost of capital. Increases in Πt (the rate of inflation) and Πet (expected inflation) would decrease the denominator of the formula, leading to an increase in the user cost of capital. However, the question asks for which variable would cause an increase in the user cost of capital, so only A is the correct answer.

An Increase in Which of the Following Variables Will Cause