The United States government has decided to extend tax breaks so that the cost of borrowing funds used to buy equipment and other machinery is reduced. Which factor of production would be most impacted by this?

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BlackTom AI · Accepted Answer

The question asks which factor of production would be most affected by extending tax breaks that reduce the cost of borrowing funds to purchase equipment and other machinery.

First, consider what each factor represents: physical capital refers to tangible assets like machines, equipment, factories, and infrastructure used in production. Human capital refers to the knowledge, skills, and abilities of workers. Land refers to natural resources. Entrepreneurship involves the vision and organization to combine the other factors.

Since the policy specifically lowers the cost of financing for buying equipment and machinery, the immediate and strongest impact will be on physical capital. Lower borrowing costs make it cheaper for firms to invest in new machinery, upgrade equipment, and expand productive capacity, thereby increasing the stock of physical capital on hand.

Human capital, while still important for productivity, is not directly driven by cheaper loans for equipment. Training, education, and skill development are influenced by different incentives and investments, such as schooling costs, wage structures, and on-the-job training programs, rather than direct capital financing for equipment.

If we think about other options conceptually: land is tied to natural resources and generally not affected by financing terms for equipment; entrepreneurship could respond over time but its primary leverage from such breaks would be through investment decisions and risk-taking, which again connect more to capital costs rather than the immediate allocation of human skills.

That said, the statement provided as an answer—'Human capital'—is mismatched with the described policy instrument. The described tax breaks target the cost of borrowing for equipment, which most directly shifts production toward increased physical capital accumulation rather than directly expanding or enhancing human capital resources.

In summary, the mechanism described in the question is a classic driver of physical capital investment: cheaper borrowing lowers the hurdle for purchasing capital goods, thereby expanding the physical capital stock used in production. The human capital angle would require different policy levers focused on education and training incentives rather than financing for equipment.

SOC-ECONB Module 1 Pretest

The United States government has decided to extend tax breaks so that the cost of borrowing funds used to buy equipment and other machinery is reduced. Which factor of production would be most impacted by this?

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