Exam 4: Consumption, Saving, and Investment

With a nominal interest rate of 8%, an expected inflation rate of 3%, and interest income taxed at a 25% rate, what is the expected after-tax real interest rate?

Which of the following machines has the lowest user cost? Machine A costs $15,000 and depreciates at a 25% rate, machine B costs $10,000 and depreciates at a 20% rate, machine C costs $20,000 and depreciates at a 10% rate, and machine D costs $17,000 and depreciates at an 11% rate. The expected real interest rate is 5%.

A decrease in the real interest rate will

Calculate the user cost of capital of a machine that costs $5,000 and depreciates at a 25% rate, when the interest rate is 5%.

The Ricardian equivalence proposition suggests that a government deficit caused by a tax cut

In 2001 your firm's capital stock equaled $10 million, and in 2002 it equaled $15 million. The average depreciation rate on your capital stock is 20%. Gross investment in 2002 equaled

Perpetual plastic plant makers cost $200 each. The number of plants that your firm expects to produce each year for each level of capital stock is as follows: Machines Plant Production 0 0 1 250 2 400 3 500 4 565 5 600 The plants sell for $1 each and your firm faces no other costs. The real interest rate is 10% and the depreciation rate of capital is 15%. There is a 20% tax on your firm's revenues from selling these plants. a. What is the firm's tax-adjusted user cost of capital? b. What is the marginal product of capital for each number of machines (1, 2, 3, 4, and 5)? c. How many machines should the firm buy? What is their production, pretax revenue, and profit after deducting taxes, interest, and depreciation?

An invention that raises the future marginal product of capital would cause an increase in desired investment, which would cause the investment curve to shift to the ________ and would cause the real interest rate to ________.

All else equal, a decrease in the expected future MPK will lead to

An increase in expected real interest rates would probably cause desired national saving to rise because

Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent increase in the depreciation rate now has what effect on your desired capital stock?

A temporary increase in government purchases would cause

Three factors that cause interest rates among different financial instruments to vary are

The nominal interest rate on taxable bonds is 8%, while on municipal bonds (which aren't taxable) it is 5%. The expected inflation rate is 3% and the tax rate on interest income is 40%. Calculate the expected after-tax real interest rate on both bonds. Which would be the better investment? Now suppose the actual inflation rate turned out to be 6%. Which bond was the better investment? Would your answer change if inflation had turned out to be 0%?

You have just purchased a new VCR to show videos to your customers. The VCR cost $500, and you depreciate the machine at a rate of 25% each year. You can borrow money from the bank at 10%, or receive 6% for depositing money at the bank. The expected inflation rate in the coming year is 5%. You used the company's own funds to purchase the VCR. The firm's user cost of capital for the first year is

A temporary increase in government purchases, given the level of output, will lead to

An economy has full-employment output of 5000. Government purchases are 1000. Desired consumption and desired investment are given by C^d = 3000 - 2000r + .10Y I^d = 1000 - 4000r Where Y is output and r is the real interest rate. The real interest rate that clears the good market is equal to