Question

Chapter 7.1

1. At the beginning of the year, a bakery had a capital stock of 5 baking ovens. During the year, the bakery had to scrap 2 old ovens and purchased 3 new baking ovens.
   1. The bakery’s gross investment for the year totaled ______baking oven(s).

2. The bakery’s net investment for the year totaled _____baking oven(s).

2. This year Dominoes’ makes a total investment of $1.2 billion in new stores. Its depreciation in this year is $200 million.
   1. Dominoes’ gross investment is _____

2. 2. Dominoes’ net investment is ______
3. At the beginning of the year, your wealth is $10,000. During the year, you have an income of $80,000 and you spend $90,000 on consumption. You pay no taxes. Your wealth at the end of the year is ______

Chapter 7.2

4. Suppose that a bond promises to pay its holder $50 a year forever.
   1. If the price of the bond is $1,000, what is the interest rate on that bond?

2. If the price of the bond increases from $1,000 to $1,250, then what is the interest rate on the bond?

5. Carlos can make a computer add in for $600 and sell it after 3 years for $2,509. The interest rate is 6% a year.
   1. What is the present value?

2. What is the net present value?

6. Suppose that you took out a $2,000 loan in January and had to pay $50 in annual interest. During the year, inflation was 2%.
   1. What is the nominal rate?

2. What is the real rate?

7. Assume you save $2,000 in a bank account that pays 9% interest per year and the inflation rate is 3%. What is the real monetary return in dollars at the end of the year?

8. Explains what happens to:
   1. to the demand of loanable funds curve when there is an increase and a decrease in real interest rates.

2. to the supply of loanable funds curve when there is an increase and a decrease in real interest rates.

9. (2 points) Explain what it means when the loanable funds market is in ‘Equilibrium’.

Answer 1

chapter 7.1 Answer :-

=>(A) Gross investment is the total purchased baking ovens during year. so gross investment is 3 baking ovens.

=>(B) net investment is the difference of gross investment and scrap. so net investment = 3 - 2 = 1 baking oven

​​​​.

=>(A) Domino's gross investment is $1.2 billions.

=>(B) Domino's net investment is = gross investment - depreciation = $1.2 billions - $200 millions = $1 billions

=> Wealth at the end = wealth at beginning + wealth during year

.

= $10000 + ($80000-$90000)

= $10000 + (-$10000)

= 0

so wealth is zero at the end .