Chapter 39, Problem 2MCQ

To determine

To know

The factor that can lead to an increase in physical capital in an economy.

Explanation of Solution

An increase in investment spending will help the firms in increasing the level of physical capital, such as installing new machines and equipment, expanding their branches, and improving human capital along with the existing infrastructure.

Physical capital is the stock of equipment and tools that are used to produce goods and services. It includes machinery, buildings, equipment, and non-tangible goods. Physical capital such as machinery and equipment along with supporting infrastructure like roads, ports, railways, warehouses, and other storage facilities will improve the production capacity and thus will promote economic growth in an economy.

Thus, option “a” is correct.

The other options are incorrect because savings by domestic households and foreign households and the inflow of foreign capital don’t lead directly to an increase in the physical capital. The savings can be used for different purposes. It doesn’t necessarily increase the physical capital in an economy.