Suppose that economy wide, the the expected future marginal product of capital is given by MPKA-0.02K....

 

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Suppose that economy wide, the the expected future marginal product of capital is given by MPKA-0.02K. Suppose that next year the productivity is expected to be A = 10. (a) If the price of capital is 1 and the depreciation rate is 5%, what is the user cost of capital as a function of the real interest rate r? (Assume no taxes) (b) What is the desired capital stock as a function of r? (c) If the current capital stock is Ko = 495, what is desired investment, I", as a function of r? (d) If desired savings is given by Sd = 20 + 100r what is the equilibrium real interest rate and investment? (e) If the nominal interest rate is 10% what must be the expected inflation rate? (Hint: How do you relate the real interest rate to nominal interest rate?) Suppose that economy wide, the the expected future marginal product of capital is given by MPKA-0.02K. Suppose that next year the productivity is expected to be A = 10. (a) If the price of capital is 1 and the depreciation rate is 5%, what is the user cost of capital as a function of the real interest rate r? (Assume no taxes) (b) What is the desired capital stock as a function of r? (c) If the current capital stock is Ko = 495, what is desired investment, I", as a function of r? (d) If desired savings is given by Sd = 20 + 100r what is the equilibrium real interest rate and investment? (e) If the nominal interest rate is 10% what must be the expected inflation rate? (Hint: How do you relate the real interest rate to nominal interest rate?)