Suppose that you are a consumer who considers buying a house to live in for the next 5 years. After spending some time to search for a house, you find a nice house whose current market price is $200,000. If you do not want to buy the house, you have an alternative option; you can rent the house by paying $100,000 today to the owner of the house (notice that once you pay for the rent, it will not be refunded after the rental contract expires). Suppose that there is no additional cost associated with buying the house. The annual interest rate of the bank deposit, which is the only alternative asset in this economy, is 5%. Assume that you only consider the rate of return from the asset. You now have $200,000 so that you do not have to borrow money from the bank if you choose to buy the house. After 5 years, you plan to sell the house at the market price P E H if you own the house.

1. What is the minimum value of P E H that makes you indifferent between buying the house and renting the house?

2. The central bank suddenly lowers the interest rate of the bank deposit to 3%. In order to buy the house, what should be the new value for ?

A firm considers an investment project; it plans to buy new super computers in order to enhance the productivity of the firm. Table 1 shows the aggregate return from the purchases of super computers. For instance, when the firm buys 3 computers, the additional return in the next year will be $2,700. The computer fully depreciates after one year.

Table 1: Computers and Returns Units of computers

Units of computers Return ($)

1 2 3 4 5 1,000 1,900 2,700 3,400 4,000

Suppose that the unit price of the computer is $800. The firm does not have any internal fund so that it should borrow from the bank to finance the investment project. The current market interest rate for the one-year borrowing is 10%. How many computers should the firm buy? What happens if the market interest rate surge to 15%? Discuss the relationship between the interest rate and investment. .

Consider the market for loanable funds as learned in the class (I = S + T − G). Please explain what happens to this market, using the diagram with investment and saving, when the economy faces the following changes.

1. Because of the heightened political tension between South Korea and North Korea, the military spending by the government in South Korea surges but tax remains as the same.

2. As the concern for the sustainability of national pension system increased, consumers reduce consumption in order to prepare for the life after retirement.

3. The congress passes the bill to lower the tax for the investment. Contrary to lecture, suppose that tax also decreases due to changes in investment credit.

Must:

1. Show calculation work

2. provide step-by-step explanation

Answer rating: 100% (QA)

Question 1 1 What is the minimum value of P E H that makes you indifferent between buying the house and renting the house To calculate the minimum value of P E H we need to compare the present value o... View the full answer