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Show what happens to the firm’s optimal level of capital after a decrease in productivity. Sketch...

  1. Show what happens to the firm’s optimal level of capital after a decrease in productivity. Sketch the impact on the investment demand curve.
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Answer #1

Answer:

We know the relationship between capital and profuctivity i.e., as capital invested reduces, the productivity of labour also reduces.

Hence, in this question we can assume that a decrease in productivity leads to a decrease in firm's optimum level of capital.

Also this leads to a rise in nominal interest rate of investment.

A graphical representation is provided below ?

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