If an economy has gross investment of 240 and replacement investment of 300, what will be the effect on its capital stock?
Answer and explanation
Correct answer: Capital stock will decrease by 60
Replacement investment represents the amount needed to offset depreciation. Therefore, depreciation here is 300. Net investment = Gross investment − Depreciation = 240 − 300 = −60. The negative result means that investment was insufficient to replace the capital lost, so the capital stock falls by 60. Equality would have kept it unchanged.
Frequently asked questions
What is the correct answer to this question?
Capital stock will decrease by 60
Why is this the correct answer?
Replacement investment represents the amount needed to offset depreciation. Therefore, depreciation here is 300. Net investment = Gross investment − Depreciation = 240 − 300 = −60. The negative result means that investment was insufficient to replace the capital lost, so the capital stock falls by 60. Equality would have kept it unchanged.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates.
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