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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?
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he questions posed are broad and open ended so be careful to allow yourself enough research and planning time. If you are completely on top of the material delivered in class, then
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barriers to entry?
What does a shift in the demand to the right mean? Why does the demand curve shift?
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