Use the neoclassical model of investment to explain the impact of each of the following on...

Use the neoclassical model of investment to explain the impact of each of the following on the user cost of capital, the marginal product of capital, and investment.

a. Anti-inflationary monetary policy decreases the rate of inflation.

b. An earthquake destroys part of the capital stock.

c. Immigration of foreign workers increases the size of the labor force.

d. Advances in computer technology make production more efficient.

Solutions

Expert Solution

ANSWER

impact of each of the following on the rental price of capital,

the cost of capital, and investment.

A) rise in interest rates investment demand falls and the cost of capital rises.This discourages spending and reduces economic growth.
Anti inflationary is while using monetary policy i.e. contraction of money suuply this raises interest rates and reduces prices bringing down inflation rate .
B)Because of capital stock destruction the supply gets affected due to which prices rise and the cost of capital rises.
C). High unemployment would again reduce inflaton and interest rates will be high , reducing capital investment and but rental price of capital would rise.
Increase in labor force results raises supply but wages would fall because there is high bargaining power for firms to buy labor from outside so they will pay lower rates.
D).It reduces cost in production and increases efficiency on the same set of output , economy faces rise in prices and fall in interest rates that fosters more investment demand in the economy.
Advancement in computer technology will increase labor productivity and output which increases aggregate demand in the economy

Rahul Sunny answered 1 year ago

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