What is the relationship between capital stock, investment, and output?

The correct answer emphasizes the positive relationship between capital stock, investment, and output. When capital stock increases, this typically signifies that more physical assets (like machinery, buildings, or technology) are available in the economy. In turn, firms are likely to invest more in these assets to enhance production capabilities. Increased investment can lead to greater productive capacity, meaning that firms can produce more goods and services, which translates into increased overall output in the economy.

This relationship aligns with the fundamental principles of macroeconomic theory, where capital is a crucial factor of production. As firms accumulate more capital, they enhance their efficiency and productivity, leading to an upward movement in output levels. For a functioning economy, higher capital stock usually indicates healthier investment activities, fostering economic growth.

The other options suggest scenarios where the relationship between these variables is either negative or nonexistent, which does not reflect the typical dynamics observed in macroeconomic models.