Exam 16: Interest Rates, Investments, and Capital Markets

You grow poplar trees.The lumber yard purchases cut trees from you.The trees grow 1 foot per year.Assuming a constant real price per foot for poplar and a real interest rate of 3%,would you sell a 20-foot tree today?

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.His cost of going back to college is

If inflation turns out to be higher than was anticipated,

Bobby faces two choices.The first is to receive $600 on the spot.The other choice is to receive $800 a year from now.The interest rate is 5% per year.What could a possible explanation for Bobby choosing to receive $600 on the spot?

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.If these are real amounts (adjusted for inflation),then the discount rate to be used should be

Consider a wine maker who has put her wine in bottles.The question is whether to store the wine for a marginal cost of $1 per year or to sell the wine today at a price of $10.If the interest rate is 6%,how much must the price of the wine increase in the next year to justify storing it?

Explain why a firm may rationally make an investment when its cash flow from the investment is not positive each year.

Alchemy was the attempt to discover a process by which base metals,such as lead,could be turned into gold.If an alchemist had been successful,

A firm should make an investment if the expected return is greater than

You place $100 in a bank account that pays 8%.If you remove the interest you receive each year you can turn your stock into a flow of

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.Which of the following makes it less likely that Joe will decide to go back to college full-time?

If your bank pays you 6% interest on a savings account and inflation is 2%,your approximate real rate of interest is

Explain how continuing technical progress may cause the price of scarce,exhaustible resources to fall over time.

Suppose government does not allow households to deduct their mortgage interest expenses from their income tax anymore.How this change is represented in the loanable funds model?

A firm has two projects.Project A has an internal rate of return of 6%.Project B's internal rate of return is 11%.If the firm's discount rate is 9.57%,

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.From an investment standpoint,Joe will go back full-time if

Suppose $100 is deposited in a bank account paying 5% compounded annually.If the interest earned is X after 5 years,then the interest earned will be 2X after 10 years.

Assel grows mulberry trees.The lumber yard purchases cut trees from you.The trees grow 1 foot per year.Assuming a constant real price per foot for mulberry,at what interest rate would Assel be willing to sell a 10-foot tree today?

In an economy with no inflation,explain why interest rates are positive.

Suppose that your college offers you two payment plans.You may either pay tuition of $10,000 per year at the beginning of each of the next four years,or pay just $38,000 before the start of freshman year.If the interest rate is 10%,what would you do? If the interest rate were 2%,what would you do? Intuitively explain the difference in your answer.