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2.b) (25 (25 points) Two-Period Production Economy. Explain if the following statement is true or false: "In the model reviewed in Chapter 5 of Schmitt-Grohe, Uribe, and Woodford, a DECREASE in the world interest rate (r*=r1) causes, all else equal, the following four changes: (i) an INCREASE in investment in period 1 (11); (ii) an INCREASE in the profits of the firms in the second period (TT2); (iii) an INCREASE in consumption in period 1 (C1); and (iv) a REDUCTION in savings in period 1 (S1)." Do not forget to show step by step your algebraic calculations. Support your explanation with equations and a granh of the ontimal level Figure 5.3: The optimal level of investment 1+11 MPK = A,F'(11) 1 Notes. The downward sloping line is the marginal product of capital schedule. The horizontal line depicts the marginal cost of capital schedule, which is equal to the gross interest rate, 1+ri, for any level of investment. Firms invest up to the point where the marginal product of capital equals the marginal cost of capital, I;. Profits are given by the triangle below the marginal product of capital schedule and above the marginal cost of capital. 2.b) (25 (25 points) Two-Period Production Economy. Explain if the following statement is true or false: "In the model reviewed in Chapter 5 of Schmitt-Grohe, Uribe, and Woodford, a DECREASE in the world interest rate (r*=r1) causes, all else equal, the following four changes: (i) an INCREASE in investment in period 1 (11); (ii) an INCREASE in the profits of the firms in the second period (TT2); (iii) an INCREASE in consumption in period 1 (C1); and (iv) a REDUCTION in savings in period 1 (S1)." Do not forget to show step by step your algebraic calculations. Support your explanation with equations and a granh of the ontimal level Figure 5.3: The optimal level of investment 1+11 MPK = A,F'(11) 1 Notes. The downward sloping line is the marginal product of capital schedule. The horizontal line depicts the marginal cost of capital schedule, which is equal to the gross interest rate, 1+ri, for any level of investment. Firms invest up to the point where the marginal product of capital equals the marginal cost of capital, I;. Profits are given by the triangle below the marginal product of capital schedule and above the marginal cost of capital