1. Assume an economy has the following production function: Y=F(K,L)=Ko.25Lo.7s If the savings rate is 0.2 and the depreciation rate is 0.05, calculate the steady-state capital stock per worker fitltl21 K*
2. You read in a newspaper that the nominal interest rate is 12 percent per year inCanada and 8 percent in US. Suppose that the real interest rates are equalized in the two countries.
a) Using Fisher equation, what can you infer about the expected inflation in Canada and in the US.
b) What can you infer about the expected change in the exchange rate between the Canadian dollar and the US dollar?
c) A friend proposes a get-rich-quick scheme: borrow from a US bank, deposit in the Canadian bank. What's wrong is this scheme?