The price of a unit of capital is $2,000. The rate of depreciation is: 5% per year
Question:
The price of a unit of capital is $2,000. The rate of depreciation is: 5% per year and the annual real rate of interest is: 10%
The equation for the expected future marginal product of capital is given as: MPK = 1000 10K
- plot the user cost of capital line. Label this line 'uc'.
- locate the desired (equilibrium) capital stock. Label this point 'A'.
3.b) The equation for the marginal productivity of capital is given by:
MPKf = 100010K. Suppose the price of a unit of capital is $2000, the depreciation rate is 2% per year, and
the real interest rate is 14% per year.
- The user cost of capital (uc) = $
- The desired capital stock (K*)= .......
- If the existing level of capital Kt is equal to 50 units, the level of gross investment
(It) = ...... units.
3.c) The diagram to the right shows equilibrium in the goods market defined by point A.
- Show the effects of a decline in the productivity of capital. Properly label this line.
- Identify the new goods market equilibrium. Label this point 'B'. - This shock will lead to ........... in the real interest rate. (increase or decrease?)
3.d) The diagram to the right shows equilibrium in the goods market defined by point A.
- show the effect of this shock on the desired savings schedule. Properly label this line.
- show the effect of this shock on the investment demand schedule. Properly label this line.
- identify the new point of equilibrium. Label this point 'B'.
Hint: the real interest rate need not change. Show this in your drawing.
Macroeconomics
ISBN: 978-0321675606
6th Canadian Edition
Authors: Andrew B. Abel, Ben S. Bernanke, Dean Croushore, Ronald D. Kneebone