Answer to Question #62162 in Macroeconomics for Beth Y.

Question

Assume realistically that the U.S. receives capital flows from the rest of world. In
addition, assume that foreign capital increases the level of total factor productivity from 1 to 2, by funding research and developments of new technologies. Do foreign capital inflows shift the supply curve, or the demand curve, or both curves in the capital market? Depict a diagram and explain effects of foreign capital inflows on the MPK, and the real rental rate of capital.

Answer 1

If the U.S. receives capital flows from the rest of world and foreign capital increases the level of total factor productivity from 1 to 2 by funding research and developments of new technologies, then foreign capital inflows will shift the supply curve rightward in the capital market, because the foreign caapital inflows will increase. As a result the real rental rate of capital will decrease.