Depreciation= 3%
Real Interest Rate = 7%
Cost = 300
MPK= 300-2K
Tax=25%
User cost= 30
K*=135
Only d,e,f.
Answer and explain, please include diagram.
Now conditions change. The following two shocks occur simultaneously: 1) due to supply bottlenecks the price of golf carts rises to 360 rounds of golf. ii) the expected marginal product of capital changes and is now MPK = 280 - 2K. c) (5 points) Resolve for K* and show as point B on your c/K diagram. d) (10 points) Given the two shocks as above, explain the intuition underlying the change in the profit maximizing level of carts (i.e., why does the firm change its behavior?), making sure you refer to the firm's profit maximizing condition (write it out!). Be specific and write this like you were a professional economist! Be sure to compare the actual user cost to the actual MPK after the shocks, holding K constant at its level from part b). e) (10 points) Suppose that the Federal Reserve had a goal to get the capital stock, the number of golf carts purchased to 130. Given the two shocks as above, what would they have to do to the real rate of interest to achieve their objective? Please show all work and I am looking for a specific number (i.e., r = ?). Please add this development to BOTH OF YOUR DIAGRAMS and label point C. |t) Finally, draw a desired investment diagram (completely labeled with the ALL the shift variables) depicting the initial equilibrium as point A (simply draw a negatively sloped ID curve going through point A). Label the initial level of desired investment as Id. Note importantly that we do not have numbers for desired investment, but that's ok, we are focusing on the change in desired investment. Then show, as point B, after the two shocks. Finally, show how the Fed policy maps to your investment diagram and label as point C with the corresponding level of investment labeled as 14c. Now conditions change. The following two shocks occur simultaneously: 1) due to supply bottlenecks the price of golf carts rises to 360 rounds of golf. ii) the expected marginal product of capital changes and is now MPK = 280 - 2K. c) (5 points) Resolve for K* and show as point B on your c/K diagram. d) (10 points) Given the two shocks as above, explain the intuition underlying the change in the profit maximizing level of carts (i.e., why does the firm change its behavior?), making sure you refer to the firm's profit maximizing condition (write it out!). Be specific and write this like you were a professional economist! Be sure to compare the actual user cost to the actual MPK after the shocks, holding K constant at its level from part b). e) (10 points) Suppose that the Federal Reserve had a goal to get the capital stock, the number of golf carts purchased to 130. Given the two shocks as above, what would they have to do to the real rate of interest to achieve their objective? Please show all work and I am looking for a specific number (i.e., r = ?). Please add this development to BOTH OF YOUR DIAGRAMS and label point C. |t) Finally, draw a desired investment diagram (completely labeled with the ALL the shift variables) depicting the initial equilibrium as point A (simply draw a negatively sloped ID curve going through point A). Label the initial level of desired investment as Id. Note importantly that we do not have numbers for desired investment, but that's ok, we are focusing on the change in desired investment. Then show, as point B, after the two shocks. Finally, show how the Fed policy maps to your investment diagram and label as point C with the corresponding level of investment labeled as 14c
