SIMON FRASER ECON291 tut3

SIMON FRASER ECON291 tut3 - (b) What is the firms desired...

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Economics 291: Canadian Macroeconomic Policy Tutorial #3 (week of September 28) 1. Use the saving-investment diagram to analyze the effects of following on national saving, investment, and the real interest arte. (a) Consumers become more future-oriented, and thus decide to save more (b) Government decides to cut tax (c) The government introduces an investment tax credit (offset by other types of taxes, so total tax remains unchanged) 2. Consider a firm that faces the following expected future marginal product of capital: 1000 2 f MPK K = - , where f MPK is the expected future marginal product of capital and K is the capital stock. The price of capital P K is 1000, the real interest rate r is 10%, and the depreciation rate d is 15%. (a) What is the user cost of capital?
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Unformatted text preview: (b) What is the firms desired capital stock? (c) Now suppose that the firm must pay a 50% tax on its revenue. What is the desired capital stock as a result of this tax? 3. What are the three characteristics of assets that are most important to holders of wealth? How does money compare with other assets for each characteristic? 4. Assume that prices and wages adjust rapidly so that the labor market, goods market, and money market are always in equilibrium. What are the effects of each of the following on output, real interest rate and the current price level? (a) A temporary increase in government purchases (b) A reduction in expected inflation (c) A temporary increase in labour supply...
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