( Optional ) For this question use the Cobb-Douglas production function and the corresponding desired capital stock given by K * g ( rc , Y ) ?Y
rc . Assume that ? .3, Y $5 trillion, and rc .12.
a. Calculate the desired capital stock, K *.
b. Now suppose that Y is expected to rise to $6 trillion. What is the corresponding desired capital stock?
c. Suppose that the capital stock was at the desired level before the change in income was expected. Suppose further that .4 in the gradual adjustment model of investment. What will the rate of investment be in the first year after expected income changes? In the second year?
d. Does your answer in ( c ) refer to gross or net investment?