4. The investment demand curve The following table shows the expected rate of profit and the cumulative amount of investment with that rate of profit or higher in a hypothetical economy. For example, $100 billion worth of investment projects have an expected rate of profit that is greater than or equal to 8%. Put another way, at an interest rate of 8%, the amount of investment demanded equals $100 billion. Expected Rate of Profit Cumulative Investment at this Rate of Profit or Higher (Percent) (Billions of Dollars) 10 75 8 6 4 100 125 150 Using the blue points (circle symbol), plot the hypothetical economy's investment demand curve (1) on the graph. Line segments will automatically connect the points.

4. The investment demand curve The following table shows the expected rate of profit and the cumulative amount of investment with that rate of profit or higher in a hypothetical economy. For example, $100 billion worth of investment projects have an expected rate of profit that is greater than or equal to 8%. Put another way, at an interest rate of 8%, the amount of investment demanded equals $100 billion. Expected Rate of Profit Cumulative Investment at this Rate of Profit or Higher (Percent) (Billions of Dollars) 10 75 8 6 4 100 125 150 Using the blue points (circle symbol), plot the hypothetical economy's investment demand curve (1) on the graph. Line segments will automatically connect the points.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The table below depicts the level of gross investment at various interest rates in the economy. Real Interest Rate Year 1. Gross Investment Demand Year 2 Gross Investment Demand 7% 6 5 4 3 $25,000 50,000 75,000 100,000 125,000 $15,000 30,000 45,000 60,000 75,000 Instructions: Enter your answers as a whole number. a. In year 1, if the real interest rate is 5%, what will gross investment be in the economy? b. In year 2, a recession reduces investment demand. If the real interest rate remains at 5%, what will gross investment be in the economy? $ c. Suppose the government enacts expansionary fiscal policy and funds this action through borrowing. Real interest rates increase to 7% as a result of this action. What will the new level of gross investment be in year 2? $ d. The change in gross investment due to increased government borrowing is known as O crowding out. O an economic contraction. O investment loss.
4) Distinguish between the short-run and long-run factors that affect residential investment.
What is the formula for calculating Net Present Value (NPV)? a) NPV = Total Revenue - Total Costs b) NPV = Total Costs - Total Benefits c) NPV = Initial Investment - Total Revenue d) NPV = Total Benefits - Initial Investment
Suppose that the government provides tax cuts for those who invest in new capital. Illustrate and explain how this increase in government spending affects investment and the real interest rate in equilibrium. Show a graph and explanation.
22. What could have caused the Investment function to move from I1 to I2? 23. Assuming that the Investment function moves from I1 to I2, and assuming the market rate of interest in at 15%, by how much would investment spending decrease?
10. Work It Out. Consider an economy described as follows: Y = = Y G T 1 1 Cam C = I C+I+G 8,000 2,500 2,000 1000+2/3 (Y - T) 1,200 100 r. a. In this economy, compute private saving, public saving, and national saving. b. Find the equilibrium interest rate. c. Now suppose that G is reduced by 500. Compute private saving, public saving, and national saving. d. Find the new equilibrium interest rate.
Assume an economy with 1000 consumers. Each consumer has income in the current period of 50 units and future income of 60 units, and pays a lump-sum tax of 10 in the current period and 20 in the future period. The market real interest rate is 8%. Of the 1000 consumers, 500 consume 60 units in the future, while 500 consume 20 units in the future. a) Determine each consumer's current consumption and current saving. b) Determine aggregate private saving, aggregate consumption in each period, government spending in the current and future periods, the current-period government deficit, of the quantity of debt issued by the government in the current period. c) Suppose that current taxes increase to 15 for each consumer. Repeat parts (a) and (b) and explain your results.
Assume an economy with 1000 consumers. Each consumer has income in the current period of 50 units and future income of 60 units, and pays a lump-sum tax of 10 in the current period and 20 in the future period. The market real interest rate is 8%. Of the 1000 consumers, 500 consume 60 units in the future, while 500 consume 20 units in the future. Determine each consumer’s current consumption and current saving. Current Consumption: Current Saving: Determine aggregate private saving, aggregate consumption in each period, government spending in the current and future periods, the current-period government deficit, and the quantity of debt issued by the government in the current period. Aggregate Private Saving Aggregate Consumption Government spending: Current Future Current period government deficit Quantity of debt
4. Assume that the economy is described by the following equations: Y=C+l+G, Y=8490, G-2719, T-2056, C-258+ 1/2(Y-T), I-400 + 40r. Private saving and the equilibrium interest rate are O Private saving: 2959; The interest rate: 47.4 O Private saving: 2296; The interest rate: 23.7 O Private saving: 2296; The interest rate: 47.4 O Private saving: 2959; The interest rate: 23.7
Assume there are no investment projects in the economy that yield an expected rate of return of 25 percent or more. But suppose there are $10 billion of investment projects yielding expected returns of between 20 and 25 percent; another $10 billion yielding between 15 and 20 percent; another $10 billion yielding between 10 and 15 percent; and so forth. a. Cumulate these data and present them graphically using the graph below, putting the expected rate of return (and the real interest rate) on the vertical axis and the amount of investment on the horizontal axis. Instructions: Use the tool provided 'ID' to plot the investment demand curve (plot 6 points total). 30 Tools ID 20 15 10 10 20 30 40 50 60 Investment (billions of dollars) Instructions: Enter your answers as a whole number. b. What will be the equilibrium level of aggregate investment if the real interest rate is: 15 percent: $ billion 10 percent: $ billion 5 percent: $ billion Expected rate of return, percent 25
) A college is considering investing $6 million to add 10,000 seats to its football stadium. The athletic department forecasts it can sell all these extra seats at each game for a ticket price of $20 per seat, and the team plays six home games per year. If the school can borrow at an interest rate of 14%, should the school undertake this project? (Show your math!) What would happen if the school expected a losing season and could sell tickets for only 5,000 of the seats?
The table sets out the data for an economy when the government's budget is balanced. Calculate the equilibrium real interest rate, investment, and private saving. If planned saving increases by $0.5 trillion at each real interest rate, explain the change in the real interest rate. If planned investment increases by $1 trillion at each real interest rate, explain the change in saving and the real interest rate. The real interest rate is >>> Answer to 1 decimal place. percent a year. C Real interest rate (percent per year) 4 56885 7 9 10 Loanable funds Loanable funds supplied (trillions of 2009 dollars) demanded 7.0 6.5 6.0 5.5 5.0 4.5 4.0 5.0 5.5 6.0 6.5 7.0 7.5 8.0