Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent decline in the expected real interest rate now has what effect on your desired capital stock?
(a) Raises it, because the future marginal productivity of capital is higher
(b) Lowers it, because the future marginal productivity of capital is lower
(c) Raises it, because the user cost of capital is now lower
(d) Lowers it, because the user cost of capital is now higher
Answer: C
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