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What is the impact of an increase in k 0

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Reference no: EM132415119

In the context of the macroeconomic model seen in class, the Ghanaian Minister of Finance seems to suggest that increasing K 0 will necessarily foster economic growth. This is a common belief and it usually leads people to advocate foreign aid and foreign direct investment as a cure for poverty.This is exactly what your friend does:

He asks you to donate part of your business' capital stock to Ghana in order to increase its national income.

a) Explain what is the impact of an increase in K 0 in the labour market, holding the interest rate constant.

b) Explain what is the impact of an increase in K 0 in the goods market, holding the interest rate constant.

c) Explain why the interest rate must fall following an increase in K 0 .

d) Explain how a reduction in the interest rate s the labour market and the goods market.

e) After some calculations, you determine that an increase in K 0 will reduce national income. How is this possible? Should you give some capital to Ghana then? Explain why or why not.

f) Your friend informs you that the future marginal product of capital in Ghana exceeds the sum of the interest rate and the depreciation rate. What do you suggest that Ghanaian firms do?Explain.

g) In which way a severe drought (the lack of rain for an long period of time) is likely to the Ghanaian economy? Explain.

Reference no: EM132415119

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