rate will the Bank of England have to permanently raise lower or leave

# Rate will the bank of england have to permanently

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rate, will the Bank of England have to permanently raise, lower, or leave unchanged the nominal interest rate on reserves? Discuss the economic intuition for this result, regardless of whether you derived the mathematical expression. Long question: Imagine an economy with two sectors, construction c and manufacturing m , and two firms within the manufacturing sector, firm b and firm g . The production function of the construction sector is y c = z c k α c , where α < 1 and z c is the level of productivity. The production function of the manufacturing sector is y m = z m k α m , with the same α but a different level of productivity z m . The capital in the manufacturing sector though can be provided by the g firm in k g , or the b firm by φk b , so that φ < 1 reflects the lower productivity of firm b in producing this capital. Therefore, k m = k g + φk b . All firms and sectors compete for renting capital to their activity in a market where capital must be paid at the rate r . The prices of the goods of each are p m and p c . (a) What is the optimal k g and k b in relation to a fixed k m ? Why (b) What is the ratio of capital across the two sector k m /k c in an equilibrium where both firms face the same interest rate r and compete for renting this capital? How does it depend on

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