Consider the neoclassical model of investment that we studied in the class and answer the following questions.

0.5 0.5

a) Suppose = , where A=2, L=100, and K=100. What is the marginal product of

capital (MPK) (4 points)

b) Due to Covid-19 shock, the number of labour (L) declines to L=50. What is the impact of this shock on the user cost of capital and the marginal product of capital (just explain in words, no calculation is needed)? What is the impact of this shock on Investment? Explain by drawing the graph of Investment. (5 points)

c) In response to the shock, the central bank decreases the interest rate, "r". What is the impact of this policy on the user cost of capital and the marginal product of capital? What is the impact of the policy on Investment? Explain by drawing the graph of Investment (5 points).