Suppose that the US does not allow international capital flows and migration. Let the US production function be the following: Y = F(K,L) = AK 0.3L 0.7
a. Explain effects of an increase in capital stock on the marginal product of capital and the marginal of labor.
b. Suppose a large amount of foreign capital flows to the US. Is this policy a demand shock or a supply?
c. Explain effects of the policy in Part (b) on the US capital market.
d. Explain effects of the policy in Part (b) on the US labor market.
e. Display diagrams to support your explanation in Parts (c) and (d).