1. You are considering investing in a machine that will cost you $10,000 today and will create products that are expected to generate $9,000 in revenues at the end of the year, at no additional cost. You anticipate reselling the machine at the end of the year for $2,000.

a)You would fund the investment by taking out a loan. At what nominal interest rate would you be indifferent between making the investment or not?

b)Suppose analysts now tell you that they anticipate an inflation rate of 1% for the upcoming year, which was not accounted for in your previous estimates. You believe this change in the aggregate price level will impact the sale price of your products, as well as the resale value for your machine proportionately.

i) Calculate new estimates for revenues and expected resale value of the machine.

ii) Giventhese newestimates,at what nominal interest ratewould you now beindifferent between making the investment or not?

iii) Use thisresultto help explain why we would expect to see changes in the demand for loanable funds that are consistent with the theory behind the Fisher Effect