Assume that the marginal product of capital is given by the following expression:

(K is measured is trillions).

a) Graph the demand curve for capital and find the equilibrium real rental rate of capital if capital supply is ten trillion.

b) Suppose a positive supply shock hits the economy, and is now . Draw the new demand curve and calculate the new equilibrium real rental rate of capital.

MPK = 70 K0.7 MPK = 60 K0.7

(L = 100)

Distribution of National Income