A reduction in which of the following variables will cause a reduction in the user cost of capital?

Question

Quizplus · Accepted Answer

The user cost of capital is given by the formula (r + δ - Πe)/(1 + r), where r is the interest rate, δ is the depreciation rate, and Πe is the expected inflation rate. The variable rt in option A represents the interest rate, and a reduction in the interest rate will directly reduce the user cost of capital. Therefore, option A is the correct choice. The variables Πt and Πet, representing the actual and expected inflation rates, respectively, do not have a direct impact on the user cost of capital.

A Reduction in Which of the Following Variables Will Cause