Question

Question 14: At the start of the year, your firm’s capital stock equaled $10 million, and at the end of the year it equaled $11 million. The average depreciation rate on the capital is 10%. Gross investment during the year equaled

A. less than or equal to $0 million

B. more than $0 million but less than or equal to $0.5 million

C. more than $0.5 million but less than or equal to $1 million

D. more than $1 million but less than or equal to $1.5 million E. more than $1.5 million

Question 15: With a nominal interest of 4%, an expected inflation rate of 1%, and the interest income taxed at a rate of 20%, the expected after-tax real interest rate is

A. less than or equal to 2%

B. more than 2%, but less than or equal to 3%

C. more than 3%, but less than or equal to 4% D. more than 4%, but less than or equal to 5%

E. more than 5%

Question 16: Calculate the user cost of a machine that costs $12,000 and depreciates at a rate of 10%. The nominal interest rate is 5%, and the expected inflation rate is 2%.

A. less than or equal to $1,000

B. more than $1,000 but less than or equal to $1,200

C. more than $1,200 but less than or equal to $1,400

D. more than $1,400 but less than or equal to $1,600

E. more than $1,600

Answer 1

14) initial capital stock k₁ =10 million

Final capital stock k₂ = 11million

The average depreciation is given by 10% of capital.

Gross investment = addition to capital stock + depreciation

Addition to capital stock = k₂ - k₁ = 11 - 10 = 1 million

Depreciation = 10% of 10 million = 1 million

So, gross investment = 1 million + 1 million = 2 million

Answer E

15) the nominal interest rate is 4%

Interest income is taxed at 20%

Expected inflation = 1%

So the nominal Interest earned post tax = 4% - (20/100 * 4)

= 4 - 0.8

= 3.2%

Expected after tax real interest rate = after tax nominal interest - expected inflation

= 3.2 - 1

= 2.2 %

Answer B

16) it is given that cost of machine = 12000

Depreciation rate = 10%

Nominal Interest rater= 5%

Expected inflation = 2%

The user cost of machine is the amount lost due to depreciation and the real interest foregone on the initial value of machine.

The real interest rate = nominal interest - expected inflation

= 5% - 2%

= 3%

Thetefore user cost = (10/100 * 12000) + (3/100* 12000)

= 1200 + 360

= 1560

Answer D