Q 88

Assume that a car-rental company buys cars for $20,000 each and rents them out to other businesses.The company faces a nominal interest rate of 10 percent per year,and car prices are rising at 6 percent per year.If cars depreciate at 30 percent per year,what will be the company's cost of capital per car?

Q 89

Assume that the production function for an economy is given by Y = AK^{a}H^{b}L^{1}^{-}^{a}^{-}^{b},where H is the stock of inventories.Then the marginal product of inventories (MPH)is given by MPH = bAK^{a}L^{1}^{-}^{a}^{-}^{b}H^{b}^{-}^{1}.If the stock of inventories does not depreciate,the price of inventories is the same as the price of output,and taxes are ignored,then the real "cost of capital" for inventories is just the interest rate r.a.Derive an expression for the "desired equilibrium stock of inventories" (H*)as a function of r and output Y by equating the cost of capital to MPH. (Hint: First substitute the production function into the expression for MPH to get MPH = bY/H.)If r = 0.1,b = 0.05,and Y = 5,000,what is the desired stock of inventories?
b.If r rose to 0.12,how would the desired stock of inventories change?

Q 90

Assume that the following model of the economy applies:
C = a + b(Y - T)
I_{fixed} = c + dY
I_{inventories} = g + hY
Y = C + I_{fixed} + I_{inventories} + G
Write an expression for equilibrium Y in this model.If b = 0.5,d = 0.2,and h = 0.2,what are the multipliers for G and T?