Question 1: Property and Capital Market Dynamics (30 points) Consider the following model for the office space and the capital market: Demand for Office (millions of sqm): D = E(11.4295 -0.07% * R) Property Price per sqm : P = Construction (millions of sqm):P = 60000 + 781909.90 Stock Adjustment (millions of sqm)AS = (-8xS Ending Stock of Space = S +AS where R= annual rent per square meter; r is the annual capitalization rate; d is the annual depreciation rate of stock of space. Suppose the initial stock of space (S) is 12 million square meters, the employment level E is 1.8 million employees and the capitalization rate is 3.4%, the depreciation rate of the stock of space is 1.4933%. a) Determine the equilibrium rent level (R*), price level (P*), construction (C*) and the ending stock of office space (5*). (20 points) b) Suppose the capitalization rate next period decreases from 3.4% to 3.0% and stays at that level for the indefinite future. What is the short-term effect on the construction level, the ending stock, the rent and the price level? What is the corresponding long- term effect? (10 points) Question 1: Property and Capital Market Dynamics (30 points) Consider the following model for the office space and the capital market: Demand for Office (millions of sqm): D = E(11.4295 -0.07% * R) Property Price per sqm : P = Construction (millions of sqm):P = 60000 + 781909.90 Stock Adjustment (millions of sqm)AS = (-8xS Ending Stock of Space = S +AS where R= annual rent per square meter; r is the annual capitalization rate; d is the annual depreciation rate of stock of space. Suppose the initial stock of space (S) is 12 million square meters, the employment level E is 1.8 million employees and the capitalization rate is 3.4%, the depreciation rate of the stock of space is 1.4933%. a) Determine the equilibrium rent level (R*), price level (P*), construction (C*) and the ending stock of office space (5*). (20 points) b) Suppose the capitalization rate next period decreases from 3.4% to 3.0% and stays at that level for the indefinite future. What is the short-term effect on the construction level, the ending stock, the rent and the price level? What is the corresponding long- term effect? (10 points)