Question

Q2. Use the neoclassical model of investment to explain the impact of each of the following on the rental price of capital, the cost of capital, and investment: (15 points) i. Anti-inflationary monetary policy raises the real interest rate. ii. An earthquake destroys part of the capital stock [this was a question of Quiz 2]. iii. Immigration of foreign workers increases the size of the labour force

Answer 1

1) if real interest rate increases than : cost of capital increase as well

2) as investment will be costlier and rental prices decrease.

2) earthquake : increase cost of capital as its a burden to investment again,

investment also costly as it increase cost of investment as destroyed things increase cost of operation, so it hindered investment.

Rental prices: increase as cost of recreation of housing is increase due to destruction of capital stock

3 immigration :

rental prices increase as workier Demand more for rent house.

Capital cost increase as they are easily available at lower wages and thus capital cost Due to there under use

Investment increase as more work force are able to work at lower cost.