midtermsolutions2 - 1. 2. 3. 4. 5. (4) Only the final good...

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1. (4) Only the final good and services are taken into consideration to avoid double counting. 2. (4) CPI includes all the goods which consumers in an economy are likely to buy regardless of the fact where the goods are from. 3. (1) According to the neoclassical theory of investment, entrepreneurs set the investment so that pf’(k)=rental price. The interest rate is the most important part of the rental price. 4. (2) This is obvious from the equation pf’(k)=rental price. 5. (4) A higher interest rate will raise the rental price. The right hand side of the equation increases. In order to have equality, the left hand side has to rise. A lower level of capital will do this. 6. (4) If the stock market values a firm more than the replacement cost, then the entrepreneur will have gain from selling stock and buying capital. If it values lower, vice versa. 7. (1) Demand for snow blowers is greater in winter than in summer. If the firm is trying to smooth the amount of production, then it is likely to have more inventories in summer. 8.
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This note was uploaded on 07/25/2008 for the course ECON 330 taught by Professor Minetti during the Spring '08 term at Michigan State University.

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