Question

Choose one of the following economic ter ms and explain them shortly. After explaining them, tell...

Choose one of the following economic ter

ms and explain them shortly. After explaining

them, tell us how the concept you choose can affect the NPV evaluation and/or a

companies’ decision towards a project or an investment (you can create an example if you

wish, or make a hypothetical example).

a.Inflation

b.Unemployment

c.Aggregate Demand

d.Aggregate Supply

e.Exchange Rate

f.Money Market Equilibrium

g.Fed Policies (the main 3 of them)

h.Supply/demand

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Homework Answers

Answer #1

a)

Inflation refers to the sustained rise in price level which is maintained for longer period of time. Very short term fluctuation in price level is not regarded as inflation.

Inflation reduces purchasing power of people. Hence, when price ups, the value of money goes down.

NPV discounts the future income and inflation reduces purchasing power of people. Hence, rise in inflation would increase discount rate since now more money shall be required to maintain same level of purchasing power.

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