Midterm 2 Review_Questions_Answers

Midterm 2 Review_Questions_Answers -...

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d86ff7c59489a7820bbd9c6931273333d3d3fe0c.doc 1 Topic 4:  The Goods Market 1. The desired level of capital stock ( K * ) will  increase  if the expected future marginal product of capital  ( MPK f increases. See Summary 6:  Determinants of Desired Investment  (page 132 4 th  Ed) (page 130 5 th  Ed) If MPK K *   2. The desired level of capital stock ( K * ) will  decrease  if the price of capital ( P K ) increases. Recall P K  is one of the determinants of the user cost of capital. The user cost of capital (uc) may be written as:  uc = (r + d) P K Where r is the real interest rate, d is the rate of depreciation and P K  is the cost of a unit of capital Sometimes the user cost of capital is called the rental cost of capital. We may express the user cost of capital in real terms by dividing the above equation by P: uc = (r + d)P K    P ρ K = P K /P MPK f ,uc MPK f 1 uc 1 MPK f 2 K K * 2 K * 1 0
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d86ff7c59489a7820bbd9c6931273333d3d3fe0c.doc 2 = real cost of capital goods so uc = ρ K (r + d) So if P K  increases, the user cost of capital (uc) increases and the desired level of capital stock K decreases.
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d86ff7c59489a7820bbd9c6931273333d3d3fe0c.doc 3 3. The desired level of capital stock ( K * ) will  decrease  if the real interest rate, ( r ) increases. See Summary 6:  Determinants of Desired Investment  (page 132 4 th  Ed) (page 130 5 th  Ed) As stated above,  uc = ρ K (r + d), so if r increases, the user cost of capital increases and the  desired level of the capital stock K *  decreases. Topic 5:  The Asset Market 4. Suppose Sally has the following list of assets: o $45 currency in her purse o A $100 bill in her jewelry box at home o $2,200 in a local savings account o $500 in a chequing account a) What is the dollar value of Sally’s assets that are considered part of M1? The dollar value of Sally’s assets that are considered part of M1 are equal to $645 M1 consists of currency in circulation and demand deposits $145 in currency  $500 in her chequing account   = $645 b) What is the dollar value of Sally’s assets that are considered part of M2? The dollar value of Sally’s assets that are considered part of M2 are equal to $2,845
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Midterm 2 Review_Questions_Answers -...

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