Questions 21-25 relate to the following information. The production function for this economy is given by Y=AK. To keep your math simple, it is assumed that labour is indexed at one. Profits are taxed at a rate . The nominal rate of interest is given by i and inflation is expected to rise at a rate . The price of capital is given by pk and capital depreciates at a rate . Use the above information to find an expression for the desired stock of capital, which you can define as K. You are given the following values for the parameters and variables: A=5; =0.5; =50%; =2%; i=4%; =3% and pk=2.5. Question 21 (3 points) Based on the information above, which of the following is the level of the desired capital stock (K): Question 21 options: 100 105 110 90 95 Question 22 (3 points) Saved Suppose that the existing stock of capital K is 100. Based on your model, which of the following would be the desired level of investment I: Question 22 options: 2 5 4 3 6 Question 23 (3 points) Suppose now that the expected rate of inflation increases from 2% to 2.5% but the central bank keeps the rate of interest constant at 4%. Find the desired stock of capital and then the level of investment rounded up to one decimal point. Which of the following combinations of K and I is correct: Question 23 options: K=123.0; I=26.0 K=125.3; I=28.3 K=123.5; I=26.5 K=122.5; I=25.5 K=124.5; I=27.5 Question 24 (3 points) Assume that expected inflation is back at 2%. Now suppose that the government decides to cut the tax rate from 50% to 45%. Again, find the desired stock of capital and then the level of investment rounded up to one decimal point. Which of the following combinations of Kand I is correct: Question 24 options: K=120; I=23 K=124; I=27 K=123; I=26 K=122; I=25 K=121; I=24 Question 25 (3 points) We know from economic theory that a tax cut will increase investment, since it will lower the user cost of capital. By how much would total factor productivity (A) have to increase to get the same increase in the desired capital stock (K) that you found in the previous question (question 24). Note that you will have to reorganize your desired capital stock equation with K on the right hand side and that the tax rate is now back at 50%. Question 25 options: A = 5.2 A = 5.5 A = 5.3 A = 5.1 A = 5.4