Reference no: EM13887964

Suppose that the corporate sector in an economy aims to do enough investing to preserve a ratio of the capital stock to output of 3. If the capital stock is less than 3 times output, ?rms in- vest; if the capital stock is above 3 times output, ?rms do not scrap capital or sell it because the scrap, or secondhand values, are very low. Instead, companies can cut gross investment so net investment can be negative. Capital wears out and companies need to invest 4% of their exist- ing capital just to preserve the value of capital. Initially, companies expect output to grow at 2% a year next year and plan their investment accordingly. What will be the level of investment if total current output is $1000 billion? Firms suddenly change their view on output growth cutting expected growth from 3% to 0. What happens to investment? Finally, ?rms become despondent and expect output to fall by 3%. In each case calculate the ratio of investment to output.