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Suppose that the desired capital stock is given as:
K* = 0.3Y/ir
Where Y = GDP, and ir is the real interest rate. Suppose further that Y = $5 trillion and that
ir = 0.12 (12 percent).
a. Calculate the desired capital stock, K*.
b. Now suppose that Y rises to $6 trillion. What is the corresponding (or new) desired capital stock?
c. Suppose that the actual capital stock (K) was equal to the desired capital stock (K*) before the increase in income from $5 trillion to $6 trillion. Assume that a gradual adjustment process of actual to desired capital occurs, such that λ = 0.4. What will the level of investment be in the first year after the change in income? What will investment be in the second year after the change in income?
The government in the cross model Net taxes NT(Y) depends positively on real GDP in the cross model In this model when national income increase
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