Econ 2450 Chp 11 Problems.pdf - Problem Set 3 1 What is the effect of an increase in d the depreciation rate on the representative firm\u2019s investment

Econ 2450 Chp 11 Problems.pdf - Problem Set 3 1 What is the...

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Problem Set 3 1. What is the effect of an increase in d , the depreciation rate, on the representative firm’s investment decision and its optimal investment schedule? Explain your results carefully. 1
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2. Consider the real intertemporal model that we studied in Chapter 11. Suppose that there is a foreign aid that suddenly increases the current capital stock K of a country. Determine the effect of this foreign aid on equilibrium output, interest rate, wage, employment, consumption, leisure, and investment. Explain. Make sure you illustrate the effect using two figures: a figure illustrating labor market clearing and a figure illustrating goods market clearing. 2
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3. Suppose that the consumer’s consumption demand function is given by C d = 0 . 8( Y - T )+10. Investment is I d = 20, government expenditure is G = 10, and tax is T = 10. (a) What is the equilibrium GDP (income)? (b) Suppose that government expenditure increases by 10 units while tax is unchanged. How will GDP change? What is the multiplier? (c) Suppose that government expenditure increases by 10 units while tax also increases by
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