An investor is considering purchasing a machine. The machine will produce $5,200 for 10 years, and requires a yearly maintenance of $200 (depreciation). The interest is expected to be consistent at 10%. At the end of the 10th year, the machine will become obsolete and worthless. a) What is the maximum value that the investor should spend on the machine? b) Now assume that in the 5th year the Fed decided to reduce the interest rate considerably and the investor decides to borrow more in order to buy more machines. Graph the ISLM model for the case where the investor expects the rate to continue being low in the future. Explain the shocks and the new equilibrium outcome.

An investor is considering purchasing a machine. The machine will produce $5,200 for 10 years, and requires a yearly maintenance of $200 (depreciation). The interest is expected to be consistent at 10%. At the end of the 10th year, the machine will become obsolete and worthless. a) What is the maximum value that the investor should spend on the machine? b) Now assume that in the 5th year the Fed decided to reduce the interest rate considerably and the investor decides to borrow more in order to buy more machines. Graph the ISLM model for the case where the investor expects the rate to continue being low in the future. Explain the shocks and the new equilibrium outcome.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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