How does it depend on the relative prices of the goods of the two sectors and

How does it depend on the relative prices of the

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and compete for renting this capital? How does it depend on the relative prices of the goods of the two sectors, and on their relative productivity. 1
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(c) Imagine now that the government provides a subsidy of μ to the construction sector, so that for each sale the firm gets p c (1 + μ ). Will this increase the capital allocated to that sector and why? (d) Imagine instead that the government puts a limit on the size of firms in the m sector, so that k g k * . Assume that k * is lower than the optimal k m . Derive a revised production function for the m sector. Is productivity higher or lower and why? Does this make the sector as a whole increase or shrink? Questions to discuss in class Short question: Why do some countries, like China, hold large reserves of foreign currency? What are some costs and benefits of doing so? Could China achieve the same benefits if it stopped accumulating foreign reserves and regained monetary independence, by choosing an alternative policy? Discussion question: You are asked by the UK government to prepare a report on some of the benefits and costs of joining the euro. Please describe at least two virtues of joining a monetary union and pitfalls of doing so. 2
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