Problem 1: Consider the following the general formula to calculate present values of benets and costs for current values, In and co, as well as future values, b1, 02, and c1, (:2, b1 52 53 5,, PVB 1 bo+l+r+(1+r)2+(1+r)3+ +(1+r)n' () Cl 82 C3 on. PVC I... 2 C0+l+r+(1+r)2+(1+r)3 +(1lr)" M Now consider a development project of production site that costs $100,000 in the rst period (on). Beginning one period after the development project is completed, it yields an expected benet of $45,000 for three years (b1, b2, b3). At the end of the last year, there is a cost of $20,000 to renovate the lot for future use. a) Should the project be undertaken if the real interest rate on nancial assets is 0? b) Should the project be undertaken if the real interest rate on nancial assets is 5 percent? c) Should the project be undertaken if the real interest rate on nancial assets is 10 percent? Problem 2: Suppose that a nancial crisis hits Eoonland and reduces the wealth of its households. Assume standard shapes for the production, labor demand, labor supply, saving and investment curves. Further, assume that Eoonland is a closed eoonomy. a) Illustrate the effect of the change in S = S(Y1,Y2, W) due to the reduction in wealth on the saving-investment diagram for the market of funds. b) What will be the resulting change in r and I? Explain. c) If the fall in household wealth makes workers supply more labor for any given real wage, how will the reduction in wealth aect the equilibrium level of employment? d) As a result, will the marginal product of labor, M PN, increase or decrease? Explain. e) How will the change in employment a'ect output? Illustrate the eects on the labor market diagram and national output diagram. f) Will the (temporary) change in GDP change S(.) in the same or opposite direction as the initial wealth reduction did? A Now suppose Econland signs a couple of trade agreements and becomes an open economy. The international real interest rate is below Econland's original real interest rate. g) Is Econland a net lender or net borrower? h) Illustrate the effect of the change in S(.) due to the reduction in wealth on the saving- investment diagram for the market of funds. i) 1Will the current account balance increase or decrease