For each of the following changes, explain what will happen to the expected marginal product of capital curve or the user cost of capital curve, and what will happen to the desired capital stock:
a. The real price of capital goods increases.
b. The depreciation rate increases.
c. The corporate income tax rate decreases.
d. The real interest rate decreases.
e. Expected future output decreases.
a. When the real price of capital goods increases, the user cost of capital curve shifts up and the desired capital stock decreases.
b. When the depreciation rate increases, the user cost of capital curve shifts up and the desired capital stock decreases.
c. When the corporate income tax rate decreases, the user cost of capital curve shifts down and the desired capital stock increases.
d. When the real interest rate decreases, the user cost of capital curve shifts up and the desired capital stock decreases.
e. When expected future output decreases, the marginal product of capital curve shifts to the left and the desired capital stock decreases.
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