Question

In: Economics

Suppose that households’ wealth substantially increases. Using the capital market diagram (which shows the desired capital...

Suppose that households’ wealth substantially increases.

Using the capital market diagram (which shows the desired capital stock), show the effects of the change in wealth on MPK (demand for capital) and the user cost of capital (supply of capital).

Solutions

Expert Solution

The capital market diagram shows the relationship between desired capital stock and MPK and user cost of capital. The determination of the desired stock of capital is illustrated in figure where on the X-axis we measure capital stock and on the Y-axis we measure MPK and rental cost of capital. As long as the marginal product of capital (MPK) is greater than the rental price or user cost of capital, it pays the firm to add to its stock of capital.

It can be seen from Figure that marginal product of capital is diminishing as there is increase in the stock of capital. Thus the firm will continue adding to the stock of capital (i.e. continue making investment) until the marginal product of capital (MPK) is equal to the rental price of capital.When the level of output or national income is expected to increase the whole curve of marginal product of capital (MPK) will shift to the right as shown in Figure.

Rahul Sunny answered 2 years ago
Next > < Previous

Related Solutions

Suppose that households’ wealth substantially increases. Using the capital market diagram (which shows the desired capital...
Suppose that households’ wealth substantially increases. Using the capital market diagram (which shows the desired capital stock), show the effects of the change in wealth on MPK (demand for capital) and the user cost of capital (supply of capital). Show the change in wealth on MPK (DEMAND FOR CAPITAL and the user cost of capital (SUPPLY OF CAPITAL)
Suppose that households’ wealth substantially increases. a. Using the labor market diagram, show the effects of...
Suppose that households’ wealth substantially increases. a. Using the labor market diagram, show the effects of this change on demand for and supply of labor. Explain what happens to the equilibrium labor input and real wage rate. b. Using the capital market diagram (which shows the desired capital stock), show the effects of the change in wealth on MPK (demand for capital) and the user cost of capital (supply of capital).
a. Use a diagram to explain the process by which a sudden decrease in households’ wealth...
a. Use a diagram to explain the process by which a sudden decrease in households’ wealth because of a decline in the stock market will, in the short run, move the economy from one long-run macroeconomic equilibrium to another. Illustrate your answer with a diagram. b. Assuming you have elected a liberal government, how would your public policymakers fix this economy? c. Would the actions you describe in your answers to question (b) cause crowding out? Explain.
1. Suppose the following occurs: (1) There is a decrease in households’ wealth due to a...
1. Suppose the following occurs: (1) There is a decrease in households’ wealth due to a decline in the stock market, (2) and at the same time, the government restricts the amount of cars that car companies can produce by placing an emission tax on each car produced. (3) the shift in the AD curve shifts more than the shift in the AS curve. Based on this information, in the short run equilibrium Price Level will __________ ; the equilibrium...
Suppose that the money supply increases substantially. Explain what happens throughout the following steps. Suppose that...
Suppose that the money supply increases substantially. Explain what happens throughout the following steps. Suppose that prior to the increase in the money supply, equilibrium GDP was equal to potential GDP. What type of output gap now exists? If potential GDP does not increase, what will happen to equilibrium GDP in the long run? - Based on your answers above, can expanding the money supply drive long-run growth? What is this relationship called?
Suppose that the money supply increases substantially. Explain what happens throughout the following steps. a. Explain...
Suppose that the money supply increases substantially. Explain what happens throughout the following steps. a. Explain how the change in the interest rate affects international demand for Canadian financial assets. How does this then affect the exchange rate? b. What effect does the change of the exchange rate have on net exports c. How do the combined changes in consumption, investment, and net exports affect the AE curve and the AD curve d. Suppose that prior to the increase in...
4. Suppose that investment demand increases by $100. Assume that households have a marginal propensity to...
4. Suppose that investment demand increases by $100. Assume that households have a marginal propensity to consume of 80 percent. Compute the first three rounds of multiplier effects as follows: a) What are the first cycle changes in spending? Total cumulative change equals? b) What are the second cycle changes in spending? Total cumulative change equals? c) What are the third cycle changes in spending? Total cumulative change equals?   5. If a balanced budget government passes a new fiscal stimulus...
In the market for foreign currency exchange, the amount of U.S. net capital outflow desired at...
In the market for foreign currency exchange, the amount of U.S. net capital outflow desired at each real interest rate represents the quantity of U.S. dollars supplied for the purpose of buying foreign assets. Select one: True False Tony, a U.S. citizen, wants to use his U.S currency to purchase bonds from a German corporation. As a result, Tony is a supplier of U.S. dollars in the foreign currency exchange market. Select one: True False Question text Suppose the imposition...
Suppose that the number of sellers in a market increases and an increase in price of...
Suppose that the number of sellers in a market increases and an increase in price of a substitute good occurs. What would we expect to happen in the market?
As we have been learning that a labor market is a market in which Households supply...
As we have been learning that a labor market is a market in which Households supply labor. People in the households allocate their time to work for pay or not to work (leisure time). The labor market supply curve slopes up because the number of people willing and able to work rises as the wage rate rises and because the number of hours that each person is willing and able to work rises as the wage rate rises, at least...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT