Fiscal Policy Effects on Capital Types

Steps:

• Increased education and training spending directly enhances skills and knowledge, raising human capital.
• Funding via reduced unemployment benefits reallocates resources without directly harming human capital.
• Higher taxes on machinery imports raise costs, discouraging investment in equipment and reducing physical capital accumulation.
• Net effect: human capital rises from education focus, physical capital falls from import barriers.

Why C is correct:

• Human capital, defined as workforce skills and productivity from education (per economic growth models like Solow), increases; physical capital, tangible assets like machinery, decreases due to import taxes limiting investment.

Why the others are wrong:

• A: Human capital rises, not decreases, from education spending.
• B: Human capital rises, not decreases.
• D: Physical capital decreases, not increases, from machinery import taxes.

Final answer: C