2. A car company currently has capital stock of $100 million and

desires a capital stock of $110 million.

a. If it experiences no depreciation, how much will it need to

invest to get to its desired level of capital stock?

b. If its annual depreciation is 5%, how much will it need to

invest to get to its desired level?

c. If its annual depreciation is 10%, how much will it need to

invest to get to its desired level?

3. Burger World is contemplating installing an automated ordering

system. The ordering system will allow Burger World to

permanently replace five employees for an annual (and

permanent) cost savings of $100,000.

a. If the automated system cost $1,000,000, what is the rate of

return on the investment?

b. If the system cost $2,000,000, what would be its rate of

return?

c. If the government were to introduce an investment tax

credit that allows firms to deduct 10% of its investment from

its tax liability, what would happen to the rate of return if

the system costs $1,000,000?

d. If Burger World has to pay 8% to borrow the funds to

purchase the system, what is the most it should pay for the

system? Assume that there is no investment tax credit.

6. Suppose real GDP in an economy equals its potential output of

$2,000 billion, the multiplier is 2.5, investment is raised by $200

billion, and the increased investment does not affect the

economy's potential.

a. Show the short- and long-run effects of the change upon real

GDP and the price level, using the graphical framework for

the model of aggregate demand and aggregate supply.

b. Would real GDP rise by the multiplier times the change in

investment in the short run? In the long run?