Problem 2. (20 points) Answer the following parts (each part is a separate question)

a) Suppose that = . where Y is output, A is productivity (technology), K is capital and L is labour. When A=2, K=100 and L=400. Obtain the marginal product of capital (MPK).

b) Suppose MPC=0.75; a government increases G by $150 while (at the same time) reduces T by $150. Do you think Y will change? If yes, by how much?

c) Given that the Philips curve defines an economy as u = 6 0.4( E) where u is the unemployment rate and is the inflation rate, and the loss function which tells the social cost of unemployment and inflation is L = u + 0.052, calculate the optimal level of inflation for the economy taking expected inflation as given.

d) The people of Country A believe that their regulators are committed to a zero-inflation policy, while the people of Country B do not believe that their regulators are committed to a zero-inflation policy. What difference does this make if regulators of both the countries announce a policy that will lower inflation?