Suppose that MRKf=100010Kf, unit price if capital(Pk) = 2000, depreciation = 10%, and the real interest rate = 3%

1) Calculate the user costs (use d=0.1 and r=0.03)

2) What is desired future capital stock(Kf) equal to?

3) If current capital(Kt) = 60, what is investment equal to?

4) Suppose that the depreciation rate rises to 15% (d=0.15). Calculate the new values ofKf and investment given this shock. Did these rise or fall?

5) Continue with question 4. Show the impact of a rise in depreciation onKf using a diagram (Draw a diagram,Kf on the x-axis)

6) Continue with question 4 and 5. Discuss the impact of the rise in depreciation. (provide reasoning for the change inKf and investment)

7) Continue with question above. Use the S-I model/diagram to illustrate and discuss the impact of a rise in the deprecation rate on equilibrium r, I and S (why does r change, why do I and S change, and the impact on Y and C)