Suppose the nation’s capital stock is equal to 3200 in 2011 and that a rise in the marginal product of capital raises the desired capital stock to 3800 in 2012. Suppose also that the desired capital stock remains at 3800 in subsequent years. Assume also that net investment is described by the partial adjustment model,
I N= λ(K*-K-1)
where λ = .25
Calculate the values of net investment in 2012 and 2013.
Just need help on where to start. Professor does not give examples and am left struggling on how to solve.
To calculate the values of net investment in 2012 and 2013, we can use the given partial adjustment model:
I_N = λ(K* - K-1)
Here,
I_N represents net investment,
λ represents the adjustment parameter,
K* represents the desired capital stock,
K-1 represents the capital stock of the previous year.
First, let's calculate the net investment in 2012.
Given:
K* = 3800 (desired capital stock in 2012)
K-1 = 3200 (capital stock in 2011)
Substituting these values into the equation, we have:
I_N = λ(K* - K-1)
I_N = 0.25(3800 - 3200)
I_N = 0.25(600)
I_N = 150
Therefore, the net investment in 2012 is 150.
Now, let's calculate the net investment in 2013. Since the desired capital stock remains at 3800 in subsequent years, we have:
K* = 3800 (desired capital stock in 2013)
K-1 = 3800 (capital stock in 2012)
Again, substituting these values into the equation, we get:
I_N = λ(K* - K-1)
I_N = 0.25(3800 - 3800)
I_N = 0.25(0)
I_N = 0
Therefore, the net investment in 2013 is 0.
Therefore, the values of net investment in 2012 and 2013 are 150 and 0, respectively.