This question continues from the previous problem, focusing on how risk premiums explain the gaps in living standards across countries.
a. Investors worry about the rule of law in Turkey and also about the potential for hyperinflation and other bad macroeconomic policies. Because of these worries, the initial gap between MPK in Turkey and r* is a risk premium RP. Label RP on the vertical axis of the MPK diagram. Now where does Turkey end up in terms of k and q?
b. In light of (a), why might Turkey be keen to join the EU?
c. Some EU countries are keen to exclude Turkey from the EU. What might be the economic arguments for that position?