Question

In: Economics

11. _______ causes the level of capital stock to rise, while ________ causes the level of...

11.

_______ causes the level of capital stock to rise, while ________ causes the level of capital stock to fall.

a. Investment; depreciation

b. Inflation; deflation

c. Interest rates; the discount rate

d. International trade; consumption

e. Investment; net capital outflow

12.

According to the Foreign Exchange Market an increase in investment in a small open economy will cause _________.

a. the real exchange rate to fall.

b. the real exchange rate to remain unchanged.

c. net exports to rise.

d. net capital outflow to rise.

e. None of the above are correct.

13.

Suppose that an economy currently at a level of capital per worker that is higher than its steady state level of capital per worker.  We would expect that the economy’s capital per worker will:

a. first increase and then remain constant.

b. increase.

c. first decrease and then remain constant.

d. decrease.

Solutions

Expert Solution

(QUESTION -1 )

Answer is (A) " Investment ; Depreciation"

Capital stock is the total quantity of capital used in the production of goods and services. Change in the capital stock depends on the difference between business investment expenditures and capital depreciation. If investment in new capital exceeds the depreciation of existing capital, then the capital stock expands. On the other hand if depreciation exceeds investment, then the cvapital stock contracts.

(QUESTION -2 )

Answer is (E) " None of the above is correct"

An increase in autonomous investment in a small open economy will cause:-

# A trade surplus to shrink

# A trade deficit to increase

# Lower net capital outflows

(QUESTION -3 )

Answer is (C) " First decrease and then remain constant "

Initially if an economy is in a state where the capital per worker is higher than the steady state level. Now the economy returns to the steady state level. The capital stock per worker will fall back to its original position. Once the economy returns back to the steady state , output per worker becomes equal to the rate of technological progress and it remains constant as it was before.

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Rahul Sunny answered 1 year ago
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