Answer:
Take Note that the model has following relationship between investment and factors that affect it
Int = F(Ye, it, d, πe, tc, Kt-1)
Net investment is a function of
Expected output (Ye),
Rental or user cost of capital (such as nominal interest rate it),
Expected inflation (πe),
Corporate tax/ investment tax credit,
Existing stock of capital
For a given stock of capital,
A rise in expected output (Ye), increases investment
A rise in expected inflation (πe) increases investment
A rise in the investment tax credit increases investment.
A rise in nominal/real rate of interest decreases investment
A rise in corporate income tax decreases net investment
(a) Anti-inflationary monetary policy raises the real interest rate (r ↑). As mentioned, it will depress net investment as firms have to pay a higher rate of interest on the investment made. Such policy increases rental cost of capital and it will decrease the desired capital stock.
b) An earthquake destroys part of the capital stock (K ↓). This will reduce net investment, increases rental cost of capital and it will decrease the desired capital stock.
(c) Immigration of foreign workers increases the size of the labor force (L ↑). With more workers to share the capital stock, marginal producivity of capital rises and so net investment increases. This decreases rental cost of capital and it will increase the desired capital stock.
(d) Advances in computer technology make production more efficient (A ). This causes the net investment to increase as the marginal productivity of capital will increase. This decreases rental cost of capital and it will increase the desired capital stock.
Explanation:
