Consider an economy where all output (Y) is either consumer…
Consider an economy where all output (Y) is either consumer goods (C) or investment goods (I) . If income (Y) varies a lot from year to year, and people try to live according the permanent income hypothesis (PIH), which category of output will tend to be more volatile?
Read DetailsA country’s production function works like this each year:…
A country’s production function works like this each year: Y = 4K0.5 It rents capital from the rest of the world at a cost of r per unit of capital per year. Fortunately for us, capital doesn’t depreciate in this country, and since firms are profit maximizing, then MPK=r. The marginal benefit of a unit of capital is the MPK and the marginal cost of a unit of capital is r. If the rental rate of capital is 0.1 (or 10% per year), how much capital will it rent this year, if firms in this country are profit-maximizers?
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