The Production function is given by Y= AK1/2L1/2 The economy initial level of capital stock is 60,000 billion dollars. The nominal interest rate is 10%, the inflation rate is 4% and the depreciation rate is 10% . The real price of capital is 3000.
a) Calculate the value of the cost of capital.
b) What is the current stock of capital and future stock of capital (next period) if the value of current production is equal to 20,000 and next year will be 22,000, assuming that interest rates, inflation and depreciation stay constant.
c) Calculate net and gross investment in both periods (current and future).