2203

(15 points) Suppose that an economy has a constant nominal money supply, a constant level of real output Y=1500, and a constant real interest rate r= 0.05, and it's expected rate of inflation is 2%, i.e, T = .02. Suppose that the income elasticity of money demand is 7y=0.5 and the interest elasticity of demand 7=-0.2. (a) Suppose that Y decreases to 1425, r remains constant at 0.05 and there is no change in the expected rate of inflation. What is the percentage change in the equilibrium price level? (6) Suppose that r increases to 0.06 and Y remains at 1500. Assuming that expected inflation remains atr* = .02, what is the percentage change in the equilibrium price level? (c) Suppose that r increases to 0.06. Assuming that r = .02, what would real output have to be for the equilibrium price level to remain at its initial value?

A common economic analysis objective is to find out whether it is more profitable to purchase an asset rather than rent it. A simple case of this dilemma is currently being analyzed by a private company which wants to procure a pick-up truck for regular operation. For the next 24 months, the truck can be leased or purchased. The truck costs $9,500 if purchased now in cash. If leased, the monthly lease is $358 with the first payment due by the end of the first month. At the end of the lease term, 24 months, the truck is returned to the auto dealer with expected final repair cost of $1,000 to be paid immediately before return to dealer. If purchased, the truck can be financed through monthly payments. The financing nominal interest rate is to be negotiated with the dealer. The financing will require $2,000 down payment (paid now) and monthly payments starting at the end of the first month. After 24 months, it is expected to be worth half its purchase price.

[a] Over what range of purchase financing nominal interest rates is leasing the preferred alternative?

[b] If the nominal interest rate for purchase financing is a non-negotiable 4%, which scenario do you think will make purchase financing better than leasing: [i] pay more down payment or [ii] pay less down payment. You must provide clear analysis to support your answer.

For economic analysis, assume compounding is monthly and that MARR is 8% per year compounded monthly.

Consider a Cobb-Douglas production function Y = AKL1with = 0.6 and A = 1.5. Assume that the savings rate is s = 0.04, the population growth rate is n = 0.02 and the depreciation rate is = 0.05. 1. Using the Solow-Swan model, compute the steady state values of k, y, and of consumption per person c. 2. Find the level of s that maximizes c, and the corresponding steady state value of k.

3. Does the model allow for long-term growth? 4. Suppose the World Bank wants to help this country by either (i) directly increasing k, or (ii) by doubling A. How would each of these actions affect the steady state values of y and c and the transition dynamics of k?

Athens Corporation (AC), a small engineering firm in the Clarke-County area uses technicians to assemble its products. AC currently has Ten technicians. Each year, AC spends the following on each technician:

Basic salary= $35,000. Company paid life insurance= $5000, Company paid health insurance = $7000, Company paid retirement support (401k) = 12.5% of basic salary.

To downsides, AC decided to replace two of its technicians with a robot. AC is planning to buy the robot and recover the loan in 10 years. AC uses an interest rate (Minimum Attractive Rate of Return-MARR) of 6% for all their investments.

-Draw a CFD showing all the numbers (the MARR, the annual benefits, P- the initial investment, and years of operations)

-How much should AC buy this Robot, $P, to justify the purchase over the ten-year period?

-AC is also considering a second Alternative, Robot-X. Robot-X costs $8 million. If they buy this robot with the option to recover in 15 years, how many technicians can they let go?