Subpart (a):
The Investment and the loanable fund market of the economy.
Subpart (a):
Explanation of Solution
Investment is an asset or an item purchased today in the hope that it will generate income in the future. In that sense, the spending of capital on the purchase of new physical capitals refers to the equipment and the buildings and so forth.
When there is no possibility of loanable fund market between the students and each have to invest their own amounts, then each of the students will have the following returns after one year:
Thus, Harry will have $1,050 after one year. Similarly, the returns of Ron and Hermione can be calculated as follows:
Thus, Ron will have $1,080 after one year.
Thus, Hermione will have $1,200 after one year.
Concept introduction:
Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.
Subpart (b):
The Investment and the loanable fund market of the economy.
Subpart (b):
Explanation of Solution
When there is a loanable fund market between the students at the rate of interest 'r', each student will compare the rate of their return with the rate of interest in the loanable fund market for loanable funds, which is 'r'. When the rate of returns is higher than the rate of interest, the student would borrow and if it is lower than the interest rate, then the student will lend.
Concept introduction:
Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.
Subpart (c):
The Investment and the loanable fund market of the economy.
Subpart (c):
Explanation of Solution
When the rate of interest is 7 percent, Harry would want to lend the money with him because when he compares the
When the rate of interest increases to 10 percent, both Harry and Ron would turn out to be lenders because their rate of return is lower than the rate of interest but Hermione would still be the borrower, since the rate of return is higher than the rate of interest. Here, the quantity of loanable funds demanded is $1,000 and quantity of loanable funds supplied is $2,000.
Concept introduction:
Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.
Subpart (d):
The Investment and the loanable fund market of the economy.
Subpart (d):
Explanation of Solution
The loanable fund market will be in equilibrium when the quantity of loanable funds demanded and supplied in the market becomes equal. At 8 percent rate of interest, Harry would like to lend and Hermione would like to borrow. Ron would use his own savings to invest because the rate of interest and rate of return to him is equal and he would not like to lend or borrow. Thus, the quantity of loanable fund supplied will become $1,000 by Harry and that which was demanded will also become $1,000 by Hermione. This would make the loanable fund
Concept introduction:
Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.
Subpart (e):
The Investment and the loanable fund market of the economy.
Subpart (e):
Explanation of Solution
When the rate of interest in the economy is 8 percent, Ron will use his own capital stock and Harry would lend the amount with him. Thus, both of them will earn the same rate of return which is 8 percent. This can be calculated as follows:
Thus, both of them would earn $1,080. So, the lender Harry would earn $30 higher than without lending a return to him. In the case of Hermione, he will borrow $1,000 from Harry and would invest but he has to repay the $1,000 and its 8 percent interest to Ron. Thus, the returns to Hermione can be calculated as follows:
Thus, Hermione will have a return of $1,320 which is $120 higher than no loanable fund market. Thus, since the borrower and lender are better off in the economy, no one is worse off.
Concept introduction:
Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.
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Chapter 8 Solutions
Brief Principles of Macroeconomics (MindTap Course List)
- Bill’s father read that each year a car’s value declines by 10%. He also read that a new car’s value declines by 12% as it is driven off the dealer’s lot. Maintenance costs and the costs of “car problems” are only $200 per year during the 2-year warranty period. Then they jump to $750 per year, with an annual increase of $500 per year.Bill’s dad wants to keep his annual cost of car ownership low. The car he prefers cost $30,000 new, and he uses an interest rate of 8%. For this car, the new vehicle warranty is transferrable.(a) If he buys the car new, what is the minimum cost life? What is the minimum EUAC?(b) If he buys the car after it is 2 years old, what is the minimum cost life? What is the minimum EUAC?(c) If he buys the car after it is 4 years old, what is the minimum cost life? What is the minimum EUAC?(d) If he buys the car after it is 6 years old, what is the minimum cost life? What is the minimum EUAC?(e) What strategy do you recommend? Why? Please show each step and formula,…arrow_forwardO’Leary Engineering Corp. has been depreciating a $50,000 machine for the last 3 years. The asset was just sold for 60% of its first cost. What is the size of the recaptured depreciation or loss at disposal using the following depreciation methods?(a) Straight-line with N = 8 and S = 2000(b) Double declining balance with N = 8(c) 40% bonus depreciation with the balance using 7-year MACRS Please show every step and formula, don't use excel. The answer should be (a) $2000 loss, (b) $8000 deo recap, (c) $14257 dep recap, thank you.arrow_forwardThe cost of garbage pickup in Green Gulch is $4,500,000 for Year 1. The population is increasing at 6%, the nominal cost per ton is increasing at 5%, and the general inflation rate is estimated at 4%.(a) Estimate the cost in Year 4 in Year-1 dollars and in nominal dollars.(b) Reference a data source for trends in volume of garbage per person. How does including this change your answer? Please show every step and formula, don't use excel. The answer should be $6.20M, $5.2M, thank you.arrow_forward
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- - 1. (Maximum length one page) Consider an infectious disease with the following characteristics: Individuals can exist in three states, susceptible, infected, and recovered. Once recovered, an individual cannot be re-infected and remains immune for life. The transmission rate, t, is 1/20. The recovery rate, k, is 1/5. Each person interacts randomly with others in the population and has contacts with 10 people each time period. There is no birth or death in the population. -Initially all people are susceptible. - No one dies from the disease and there is no treatment. a) Draw a compartmental model for this infectious disease.arrow_forwardConsider an obstetrician who can perform two types of deliveries: normal deliveries and cesarean deliveries. Each typeof delivery provides different levels of income for the physician, and the physician has some ability to induce patientsto opt for cesarean deliveries. The model is as follows:The physician’s utility is defined as:U = U(Y, I)where:• Y is the income from performing deliveries.• I is the total disutility from inducementThe income Y from deliveries depends on the type of delivery:Y = Yn · N + YC · Cwhere:• Yn is the income per normal delivery, Yn = 1, 000• YC is the income per cesarean delivery, Yc = 1, 500,• Initial number of births Binitial = 100,• Post-shock number of births Bshock = 90,• a(i) = 0.1 + 0.05i is the fraction of total births that are cesareans, which increases with inducement level i,• the physician sets the inducement level to i = 2.• N = B · (1 − a(i)) is the number of normal deliveries,• C = B · a(i) is the number of cesarean deliveriesDue to a…arrow_forwardConsider an obstetrician who can perform two types of deliveries: normal deliveries and cesarean deliveries. Each typeof delivery provides different levels of income for the physician, and the physician has some ability to induce patientsto opt for cesarean deliveries. The model is as follows:The physician’s utility is defined as:U = U(Y, I)where:• Y is the income from performing deliveries.• I is the total disutility from inducementThe income Y from deliveries depends on the type of delivery:Y = Yn · N + YC · Cwhere:• Yn is the income per normal delivery, Yn = 1, 000• YC is the income per cesarean delivery, Yc = 1, 500,• Initial number of births Binitial = 100,• Post-shock number of births Bshock = 90,• a(i) = 0.1 + 0.05i is the fraction of total births that are cesareans, which increases with inducement level i,• the physician sets the inducement level to i = 2.• N = B · (1 − a(i)) is the number of normal deliveries,• C = B · a(i) is the number of cesarean deliveriesDue to a…arrow_forward
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