(Study Plan 7.1) Use the following information to work Problems 1 and 2. Michael is an Internet...
Question:
(Study Plan 7.1)
Use the following information to work Problems 1
and 2.
Michael is an Internet service provider. On
December 31, 2009, he bought an existing business
with servers and a building worth $400,000. During
his first year of operation, his business grew and he
bought new servers for $500,000. The market value
of some of his older servers fell by $100,000.
1. What was Michael's gross investment, depreciation,
and net investment during 2010?
2. What is the value of Michael's capital at the end
of 2010?
3. Lori is a student who teaches golf on the weekend
and in a year earns $20,000 after paying her
taxes. At the beginning of 2010, Lori owned
$1,000 worth of books, CDs, and golf clubs and
she had $5,000 in a savings account at the bank.
During 2010, the interest on her savings account
was $300 and she spent a total of $15,300 on
consumption goods and services. There was no
change in the market values of her books, CDs,
and golf clubs.
a. How much did Lori save in 2010?
b. What was her wealth at the end of 2010?
First Call, Inc., is a cellular phone company. It plans
to build an assembly plant that costs $10 million if
the real interest rate is 6 percent a year. If the real
interest rate is 5 percent a year, First Call will build a
larger plant that costs $12 million. And if the real
interest rate is 7 percent a year, First Call will build a
smaller plant that costs $8 million.
6. Draw a graph of First Call's demand for loan able
funds curve.
7. First Call expects its profit from the sale of cellular
phones to double next year. If other things
remain the same, explain how this increase in
expected profit influences First Call's demand for
loan able funds.
Use the following table to work Problems 10 to 12.
The table shows an economy's demand for loanable
funds and the supply of loanable funds schedules,
when the government's budget is balanced.
Real Loanable Loanable
interest funds funds
rate demanded supplied
(percent per year) (trillions of 2005 dollars)
4 8.5 5.5
5 8.0 6.0
6 7.5 6.5
7 7.0 7.0
8 6.5 7.5
9 6.0 8.0
10 5.5 8.5
10. Suppose that the government has a budget surplus
of $1 trillion. What are the real interest rate,
the quantity of investment, and the quantity of
private saving? Is there any crowding out in this
situation?
11. Suppose that the government has a budget deficit
of $1 trillion. What are the real interest rate, the
quantity of investment, and the quantity of private
saving? Is there any crowding out in this situation?
12. Suppose that the government has a budget deficit
of $1 trillion and the Ricardo-Barro effect
occurs. What are the real interest rate and the
quantity of investment?