Quantifying the accelerator effect. Suppose the capital intensity of production () is 0.3, the mark-up is 20%, the depreciation rate is 6% and the real interest rate is 4%.

(a) Use the equation for the desired capital stock in the short run [( + ) = ] to calculate the desired capital stock relative to production (you may assume a Cobb-Douglas production function if you like).

(b) Suppose that there is an increase in demand of 3%. Calculate the increase in the desired capital stock as a percent of production.