Microeconomic Theory
12th Edition
ISBN: 9781337517942
Author: NICHOLSON
Publisher: Cengage
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Chapter 17, Problem 17.7P
To determine
To find:Current price of crude oil and implication on actual pricing in the crude oil.
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Suppose you take out a loan at your local bank. The bank expects to earn an annual real interest rate equal to 33%. Assuming that the annualized expected rate of inflation over the life of the loan is 11%, determine the nominal interest rate that the bank will charge you.
Consider a perpetuity with a coupon of 100. Imagine that the perpetuity is purchased at time t when the market interest rate is equal to 5%. Furthermore, imagine that the coupon income is taxed at 40% and that capital gains are taxed at 20%. What is the after tax rate of return if the perpetuity is sold at time t+1 when the market interest rate continues to be equal to 5%?
Suppose the annual interest rate is R = 0.10 (10%). If the expected inflation rate is πe= 0.04 (4%) , then the real interest rate is
Group of answer choices
A) r = 0.07
B) r = 0.006
C) r = 0.14
D) r = 0.12
E) r = 0.06
Chapter 17 Solutions
Microeconomic Theory
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- Limitless Ltd. is planning to buy a new warehouse to store its production output. The investment would require £500,000 to be paid upfront. Thanks to the new warehouse, the company expects to increase its profits by £120,000 annually for the next five years, and then £60,000 for the following five years. Calculate the Net Present Value (NPV) of this investment opportunity if the cost of capital is 12%. Should Limitless Ltd. go ahead with the purchase of the new warehouse? Explain your reasoning. What is the payback period of this investment? Suppose the Internal Rate of Return (IRR) of this investment opportunity is 15%. Based on this information alone, should Limitless Ltd. make the investment? Why? Would this decision be consistent with that from B? Explain your reasoning. Suppose that, instead of paying the initial £500,000 now, Limitless Ltd. decides to pay it in equal instalments over the next 10 years. How much would the company need to pay each year to make all…arrow_forwardAssume 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 between 10 and 15 percent; and so forth. Cumulate these data and present them graphically, putting the expected rate of return on the vertical axis and the amount of investment on the horizontal axis. What will be the equilibrium level of aggregate investment if the real interest rate is (a) 15 percent, (b) 10 percent, and (c) 5 percent? Explain why this curve is the investment demand curve.arrow_forwardConsider the market for loanable funds. Suppose the demand for loans is given by i= 40-Q+π, and the supply of loans is given by i= -30+Q+π, where π represents inflation. In the case of π=5, what is the equilbrium quantity of loans and what is the corresponsing interest rate? Q*=70, i*=45 Q*=10, i*=35 Q*=35, i*=10 Q*=45, i*=70arrow_forward
- Suppose you purchase a $1,500 TIPS on January 1, 2020. The bond carries a fixed coupon rate of 5.5 percent. Over the first two years, semiannual inflation is 1.5 percent, 1.5 percent, 4 percent, and 3 percent, respectively. What is the principal at the end of month 6?arrow_forwardConsider the market for loanable funds. Suppose the demand for loans is given be i=9-Q+π, and the supply of loans is given by i=Q/2+π, where π represents inflation. In the case of π=3, what is the real interest "r" rate given the equilibrium values found in the last question? r=0 r=3 r=6 r=-3arrow_forwardif you expect the inflation rate to be 15 percent next year and a one-year bond has a yied to maturity of 7 percent, then the real interest rate on this bond is ___%.arrow_forward
- Assume that an economy's production function is Y=1,000L1/2,so that when the marginal product of capital is equated to the real wage the labor demand curve is L = 250,000(P/W)2. The labor supply curve is L = 31,250(W/P). The real wage that solves these equations is W/P = 2. Assume that the expected price level is 10, so that a nominal wage contract setting the wage at 20 is agreed to, making the expected real wage 2. If the price level turns out to be 10, 62,500 workers will be hired and output will be 250,000. If the actual price level turns out to be 20, what will the actual real wage be?b. According to the labor demand curve, how much labor will be demanded if the actual real wage is at the level given in part a?c. According to the production function, if the amount of labor given in part b is actually hired, how much will production be?arrow_forwardCalua is an economy in which people live for three periods. They receive an endowment in only one period as follows: 80 goods when young, or 90 goods when middle-aged or 115 goods when old. The real interest rate in Calua is 10%. Given this information, what endowment should a typical person choose? Assume the interest rate increases to 15%. Which endowment should a typical person now choose?arrow_forwardIf a firm earns $375 billion in profits for the year and they retain $218 billion, what is the percent retention rate? Enter your response as a percent and do not include the percent sign. Round to 1 decimal place.arrow_forward
- Gladys agrees to lend Kay $1,000 for one year at a nominal rate of interest of 5 percent. At the end of the year prices have actually risen by 7 percent.A. Gladys earns extra real income.B. Neither party gains or loses if the loan is repaid.C. Kay receives extra real income.D. Kay loses extra real income.arrow_forwardAssume you put money into an asset that pays you 7 percent interest and inflation is 5 percent. Which statement is correct? This means the nominal rate of interest is 7 percent and the real rate is 5 percent. This means the real rate of interest is 2 percent. The textbook states that all interest rates would be assumed to be the real rate; thus, the nominal rate is 12 percent. This means the nominal rate of interest is 35 percent. If the rate of inflation falls, your real rate of interest from this asset would also fall.arrow_forward
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