During the past 20 years, there has been substantial FDI in China. What are the expected short-run effects of this FDI upon the rental rate on capital and wages in China?
A) The rental rate should increase and wages should decrease.
B) The rental rate and wages should both increase.
C) The rental rate and wages should both decrease.
D) The rental rate should decrease and wages should increase.

Question

Quizplus · Accepted Answer

In the short run, an increase in FDI leads to an increase in the supply of capital, which tends to decrease the rental rate on capital. The increased capital can enhance productivity, leading to higher demand for labor and thus increasing wages.

During the Past 20 Years, There Has Been Substantial FDI