MACROECONOMICS W/CONNECT
18th Edition
ISBN: 9781307253092
Author: McConnell
Publisher: Mcgraw-Hill/Create
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Chapter 17, Problem 1RQ
To determine
Given scenarios represent the economic investment or financial investment.
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2. A man is considering investing P500, 000 to open a semi-automatic auto-washing
business in a city of 400, 000 population. The equipment can wash, on the average, 12 cars
per hour, using two men to operate it and to do small amount of hand work. The man plans
to hire two men, in addition to himself, and operate the station on an 8-hour basis, 6 days
per week, 50 weeks per year. He will pay his employees P25. 00 per hour. He expects to
charge P25. 00 for a car wash. Out-of-pocket miscellaneous cost would be P8, 500 per
month.
He would pay his employees for 2 weeks for vacations each year. Because of the length of
his lease, he must write off his investment within 5 years. His capital now is earning 15%,
and he is employed at a steady job that pays P25, 000 per month. He desires a rate of
return of at least 20% on his investment. Would you recommend the investment?
a) Use ROR method (
b) Use present worth method:
c) Use future worth method
d) Solve for the payback period and the IRR,
Suppose that the demand for loanable funds for car loans in the Milwaukee area is $12 million per month at an interest rate of 1O
percent per year, $13 million at an interest rate of 9 percent per year, $14 million at an interest rate of 8 percent per year, and so on. If
the supply of loanable funds is fixed at $15 million, what will be the equilibrium interest rate?
Instructions: Enter your answer as a whole number.
percent per year
Manipulate the graph to show what will happen to supply and
demand in the market for loanable funds when the
government budget deficit increases, changing the
equilibrium quantity of loanable funds by 3
percentage points.
Ceteris paribus, what is the new interest rate?
interest rate:
Ceteris paribus, private investment would
increase.
not change.
decrease.
%
20
10
9
Supply
8
Interest rate (%)
7
CO
5
LO
3
2
1
0
0
2
Demand
4 6 8 10 12 14 16 18 20 22 24 26 28
Quantity of loanable funds (% of GDP)
Chapter 17 Solutions
MACROECONOMICS W/CONNECT
Ch. 17 - Prob. 1DQCh. 17 - Prob. 2DQCh. 17 - Prob. 3DQCh. 17 - Prob. 4DQCh. 17 - Prob. 5DQCh. 17 - Prob. 6DQCh. 17 - Prob. 7DQCh. 17 - Prob. 8DQCh. 17 - Prob. 9DQCh. 17 - Prob. 10DQ
Ch. 17 - Prob. 11DQCh. 17 - Prob. 12DQCh. 17 - Prob. 1RQCh. 17 - Prob. 2RQCh. 17 - Prob. 3RQCh. 17 - Prob. 4RQCh. 17 - Prob. 5RQCh. 17 - Prob. 6RQCh. 17 - Prob. 7RQCh. 17 - Prob. 8RQCh. 17 - Prob. 9RQCh. 17 - Prob. 10RQCh. 17 - Prob. 1PCh. 17 - Prob. 2PCh. 17 - Prob. 3PCh. 17 - Prob. 4PCh. 17 - Prob. 5PCh. 17 - Prob. 6P
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- The Atlantic Investment Tax Credit is a 10% tax credit available to businesses that make specific investments in the Atlantic region and the Gaspe Peninsula. The graph shows the market for loanable funds. Show the impact of this tax credit by moving the proper curve appropriately in the graph. The new equilibrium interest rate is The quantity of loanable funds is $ 1 Incorrect 5 Incorrect I billion Which statement accurately describes the impact of the Atlantic Investment Tax Credit? % Firms find that more investments are profitable and increase their demand for loanable funds. As a result, the interest rate rises. Interest rate (%) 10 10 3 2 0 0 5 10 15 20 25 30 35 Quantity of loanable funds (in billions) 40 Supply 45 Demand 50arrow_forwardThe following table shows the average nominal interest rates on six-month Treasury bills between 1971 and 1975, which determined the nominal interest rate that the U.S. government paid when it issued debt in those years. The table also shows the inflation rate for the years 1971 to 1975. (All rates are rounded to the nearest tenth of a percent.) Nominal Interest Rate Inflation Rate Year (Percent) (Percent) 1971 4.5 4.2 1972 4.5 3.3 1973 7.2 6.3 1974 8.0 11.0 1975 6.1 9.1 Source: "FRED Economic Data," Federal Reserve Bank of St. Louis, last modified September 23, 2019, accessed September 24, 2019, https://fred.stlouisfed.org. On the following graph, use the orange points (square symbol) to plot the nominal interest rates for the years 1971 to 1975. Next, use the green points (triangle symbol) to plot the real interest rates for those years. 8.0 7.0arrow_forwardSuppose that the interest rate at which Joanne can borrow and lend is 10 percent per year, but she can earn $22,000 with a high school degree. Her tuition and books at college cost $6,000 and her living expenses are $15,000 per year. Savings are deposited at the end of the year they are earned and receive (compound) interest at the end of each subsequent year. Similarly, the loans are taken out at the end of the year in which they are needed, and interest does not accrue until the end of the subsequent year. Now that the interest rate has risen, should Joanne go to college or go to work?arrow_forward
- You have heard about a new "green" light bulb that is costly to purchase but uses less electricity and thus allows you to save money on your utility bill. Suppose the new light bulb costs $10 today, but next year your electricity bill will be $50 lower. If the interest rate is 10%, what is the net present value of buying this new light bulb and using it for one year? O A. $40 B. -$45.45 OC. $55 OD. $35.45arrow_forward6-17 A rough rule of thumb for the chemical industry is that $1 of annual sales requires $2 of fixed- capital investment In a chemical processing plant where this rule applies, the total capital investment is $2,500,000, and the working capital is 20 percent of the total capital investment. 1 The annual total product cost amounts to $1,500,000. If the income tax rates on gross earnings total 35 percent, determine the following: a. Percent of total capital investment returned annually as gross earnings Percent of total capital investment returned annually as net profit b.arrow_forward4. Other things equal, what effect will each of the following changes independently have on the equilibrium level of real GDP in a private closed economy? LO11.5 a. A decline in the real interest rate. b. An overall decrease in the expected rate of return on investment. c. A sizable, sustained increase in stock prices.arrow_forward
- You have $40,000 of current income and $60,000 of future income. The interest rate between the current and future period is 5 percent. What is the maximum amount you could consume in the future? O $100,000 O $107,000 O $102,000 O $110,000arrow_forward5. Suppose after you graduate from Algoma University, you find a job that pays you $75,000 a year. Further suppose that you take out a home equity loan of $360,000 for 30 years at an annual interest rate of 3.5 percent, with payments to be made monthly. What will your monthly payments be? If the interest rate increases from 3.5 percent to 5.0 percent, how much will your monthly payments increase? Instead of 30 years, you decide to pay your loan in 25 years, what will your monthly payments be if the interest rate remains at 3.5 percent or increases to 5.0 percent. Develop a chart comparing these monthly payments. Show your work.arrow_forwardGeometric gradient. C.1.) A graduating class of civil engineers decides they will present the engineering college with a gift of $100,000 at their twenty-fifth reunion. There are 50 in the class and they can invest at 8 percent. They plan to start out giving a small amount at the end of the first year and in- crease their gifts to the class fund by 10 percent each year. Find the amount each graduate would donate at the end of the first year in order to reach their class goal of $100,000 at the end of 25 years. (Ans. C= $10.03)arrow_forward
- Assume there are no prospective investment projects (1) that will yield an expected rate of return (r) of 25 percent or more, but there are $5 billion of investment opportunities with an expected rate of return between 20 and 25 percent, an additional $5 billion between 15 and 20 percent, and so on. If the real interest rate is 15 percent in this economy, the aggregate amount of investment will be Multiple Choice O O O O $15 billion. $10 billion. $20 billion. $25 billion.arrow_forwardQUESTION 19 You lend your sister's daughter $2,000 for a year, if at the end of the year she pays you $2,180. The interest rate you are charging her is O 1.1%. O 9%. O 10%. O 20%.arrow_forward3. Present value can be used to determine the fair price -or value - of a bond. In the examples that follow, assume you are working with zero-coupon bond and that there are no transaction costs. A zero-coupon bond is one that pays all interest and the principal when the bond matures. For example, suppose somebody offers to sell you a bond that will pay a future value of $225 – interest included - when it matures in two years. If the current market interest rate is 3%, then what would be a fair price for you to pay for this bond? a. The value of a bond changes whenever the current market interest rates change. For example, suppose you bought a bond in 2015 that promises to pay you 5% annual interest until it matures in 2020. The value of your bond (i.e., the price that you can sell it for if you choose to sell it before maturity) will change if the market interest rate changes. To understand why, work through the following examples. b. Suppose you purchased a bond for $181.82 that will…arrow_forward
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