The same national leaders pass policies favoring the wealthy, which leads to a more unequal distribution of income. 5. a. Assume a simple, closed economy with no government. The marginal propensity to consume (mpc) = 0.8. Assume that firms expect the future sales and profits to fall, and they suddenly cut back (unintended) investment spending (II) by 50 million. By how much will output eventually fall? b. Now assume the same as above, except that now the mpc = 0.9. How much will output fall when unintended investment spending drops by 50 million?

. In return for a loan of 100 a borrower agrees to repay 110 after seven months. (a) Find the rate of interest per annum. (b) Find the rate of discount per annum. (c) Shortly after receiving the loan the borrower requests that he be allowed to repay the loan by a payment of 50 on the original settlement date and a second payment six months after this date. Assuming that the lender agrees to the request and that the calculation is made on the original interest basis, find the amount of the second payment under the revised transaction. 2. The commercial rate of discount per annum is 18% (this means that simple discount is applied with a rate of 18%). (a) We borrow a certain amount. The loan is settled by a payment of 1000 after three months. Compute the amount borrowed and the effective annual rate of discount. (b) Now the loan is settled by a payment of 1000 after nine months. Answer the same question. hat is the present value of 6000 due in a month assuming 8% p.a. simple discount? What is the corresponding rate of (compound) discount? And the rate of (compound) interest? And the rate of simple interest. Suppose that the interest rate is 7%. If you borrow e1000 for a year and you have to pay interest at the start of the year, how much do you have to pay.

uppose that an account offers a nominal interest rate of 8% p.a. payable quarterly. What is the AER? What if the nominal rate is the same, but interest is payable monthly? Weekly? Daily (Kellison, p. 22). Compare the following three loans: a loan charging an annual effective rate of 9%, a loan charging 8 3 4% compounded quarterly, and a loan charging 8 1 2% payable in advance and convertible monthly. Answer. We will convert all rates to annual effective rates. For the second loan, we use (1.5) with p = 4 and i (4) = 0.0875 to get 1+i = (1+i (p)/p) p = 1.0904, so the annual effective rate is 9.04%. For the third loan, we use (1.7) with p = 12 and d (12) = 0.085 to get 1 d = (1 d (p)/p) p = 0.91823. Then, we use (1.1) and (1.3) to deduce that 1 + i = 1 v = 1 1d = 1.0890, so the annual effective rate is 8.90%. Thus, the third loan has the most favourable interest rate. Consider again the equivalent payments in of i at the end of the year is equivalent to a payment of d at the start of the year.