(45) Investment Suppose the real interest rate is 5% (per year) and the deprecia
ID: 1140468 • Letter: #
Question
(45) Investment Suppose the real interest rate is 5% (per year) and the depreciation rate on capital is 10% (per year). Also, suppose the price of one unit of capital-500. The MPKf is given by MPK 150 (A K0.5 (5) Compute the user cost of capital. Show all work. (10) Solve for the desired capital stock. Show all work (5) If the current capital stock- 100, what is desired investment? (10) Now consider the investment demand curve. Suppose there is a permanent increase in the productivity of all capital, i.e., the total factor productivity (TFP) of the economy has increased permanently demand curve? Explain and illustrate (15) Now consider the investment demand curve again. Suppose there is an influx of workers into the country. How might this affect MPK? How wouldthis affect investment demand? Explain and illustrate a. b. c. d. . What does this do to the investment e.Explanation / Answer
The second potential transmission mechanism of monetary policy emphasizes the
variety of returns on different assets considering relative asset prices between each other. For a
developing country perspective such as Turkey, exchange rate could have been a
consequential intermediary role to transmit the effects of monetary policy onto the real
production side. In this way, monetary policy interventions leading to lower the real domestic
interest structure of the economy could cause the relative prices of the assets held in hand in
terms of exchange rate to be higher by the depreciation of domestic currency, in turn this case
would probably affect the net export component of aggregate demand and domestic real
income positively.
In an open economy framework, the larger the openness of domestic economy to world
markets, the stronger the influence of exchange rate channel on real domestic activity through
changes in net exports. Taylor (1995: 11-26) gives special emphasis to exchange rate channel
of monetary transmission, which uses uncovered interest parity relationship under price
rigidities employing an expectation model of term structures of interest rates settled in the
economy.
Monetarist school of thought perspective, Meltzer (1995: 49-72) examines the MTM
based on equalizing the relative prices of various assets held in hand reflecting to output
changes in the long run. Another possible transmission mechanism works through the changes
in equity prices within the economy. Mostly accompanied by Tobin (1969: 15-29) as the so-
called Q-theory, the principal way in which financial policies affect the aggregate demand is
by changing the valuations of physical assets relative to their replacement costs. With respect
to monetary policy, a monetary intervention increasing monetary base would also lead to an
increase in domestic real income either through using a direct transmission mechanism of
Monetarists causing excess monetary balances of economic agents to be spent or using an
indirect interest rate transmission mechanism of so-called Keynesians.
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