You have the following information about a firm: 1)Y=AK^0.5L^0.5, 2) A=1, L=360, I=0.06 paiAI=0.02, =0.1, p =2000, pk=500.

Determine i) the marginal product of capital (MPK),

ii) the nominal user cost of capital,

iii) the real user cost of capital, and

iv) the desired capital stock of the firm (i.e., the optimal level of capital in the steady state, K*).

b) Use the neoclassical model of investment to explain the impact of each of the following on the rental price of capital, the cost of capital, and the investment.

i. Following the COVID-19 shock, some people lost their jobs temporarily. Assuming other variables to be constant, discuss the impact of the declining 2 labour force on the rental price of capital, the cost of capital, and the investment.

ii. In response to the COVID-19 shock, the Bank of Canada gradually reduced the nominal rate of interest from around 2% to 0.25%. Assuming other variables to be constant, discuss the impact of the reduced nominal interest rate on the rental price of capital, the cost of capital, and the investment.