W7P3 - Notebook LM Flashcards
What is the role of capital in economics?
Capital increases future output, enabling higher consumption, unlike consumption which provides immediate utility.
Define gross investment (I).
Gross investment (I) is the sum of net investment (change in capital stock) and depreciation.
Explain the Capital Law of Motion.
Capital stock in the next period = all the investment undertaken + (1 - depreciation rate) * capital stock. This describes how the capital stock evolves over time, considering investment and depreciation.
How does the volatility of investment compare to that of output?
Investment is significantly more volatile than output.
How do firms determine their optimal capital stock?
Firms maximize profit where the distance between the output (production) function and cost function is greatest.
At what point is the optimal capital stock achieved?
The optimal capital stock occurs where the marginal product of capital (MPK) equals the marginal cost.
What factors influence the optimal capital stock?
The optimal capital stock depends on the marginal product of capital (MPK), interest rates, and depreciation rates. The MPK is also influenced by productivity.
How do changes in productivity affect the optimal capital stock?
Increased productivity raises the capital stock. Higher productivity shifts the MPK schedule upwards, resulting in a higher optimal capital stock.
How do changes in interest rates and depreciation rates affect the optimal capital stock?
Higher interest rates or depreciation rates decrease the optimal capital stock.
What is the relationship between investment and the optimal capital stock?
Investment depends on the same parameters as the optimal capital stock: technology, interest rates, and depreciation rate.
