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Policymaking is much easier when the stae of the economy is easily observable than when there is uncertainty about how the economy is doing, as this problem illustrates. Suppose that the economy is either in an expansion or a recession. Suppose that in an expansion, monetary policy ideally sets the interest rate on federal funds (loans between banks) at 6%, whereas if the economy is in a recession, the federal funds rate is ideally set at 2%. If monetary policymarkers know the state of the economy when they set policy, then policymaking is easy set the fed funds rate at 6% when in expansion and at 2% when in recession. Suppose, however, that policymakers cannot easily observe the current state of the economy. They know only what the state of the economy was three months ago. Suppose that if the economy was in an expansion three months ago, there is a 90% chance the economy is still in an expansion (and thus a 10% chance that it is now in a recession.) And suppose that if the economy was in a recession three months ago, there is a 75% chance that it is still in recession (and a 25% that it is now in an expansion.) Given these probabilities, what would you guess is the right setting for the federal funds rate if the economy was in a recession three months ago? What is the right setting for the federal rate if the economy was in an expansion three months ago? (Note: To answer these questions, you must make an assumption about the ideal federal funds rate when you do not know what the state of the economy is you may make any reasonable assumption you want, but you must justify it.)
First Cost: $500 Uniform Annual Benefit: $122 Salvage Value: $0 (a) Construct a choice table for interest rates from 0% to 100% (b) If the minimum attractive rate of return is 8% which alternative should be selected
a perfectly competitive market is in long run equilibrium. at present there are 100 identical firms each producing 5000 units of outputs. the prevailing market pricde is $20. assume that each firm faces increasing marginal cost .now suppose there ..
Suppose 1 year Treasury-bills were currently yielding 5.5%. Also suppose that a bank estimated that a particular loan applicant had a 30% chance of defaulting on a one year loan and that in the event of default the bank would recover only 25% of i..
while costs are expected to increase from $20,000 in year 1 by $10,000 each year. If there is no salvage value at the end of 5 years, what is the annual equivalent worth of the project assuming a MARR of 12%
WHAT FUTURE AMOUNT OF MONEY WILL BE ACCUMULATED 10 YEARS FROM NOW BY INVESTING $1000 NOW PLUS $2000 FIVE YEARS FROM NOW AT 6% INTEREST COMPOUNDED SEMI-ANNUALLY
Use the following information to calculate total revenue, marginal revenue, and marginal cost. Indicate the profit-maximizing level of output. If the price was $3 and fixed costs were $5, what would variable cost be? At what level of output would ..
Robertson Inc. wishes to set aside lump sum money to withdraw from and invest in automating parts of its business over the next 5 years. This money is expected to earn compound interest at the rate of 10% per year.
A concert is scheduled to perform at a theater with seating capacity 80. All tickets for this concert are to be sold in advance at a single uniform price per seat. Because too many empty seats can make the concert less enjoyable, the demand curve ..
A company is considering building a bridge across a river. The bridge would cost $2 million to build and nothing to maintain. The following table shows the company's anticipated demand over the lifetime of the bridge Price Per Crossing Number of C..
Suppose demand for vaccination against whooping cough is Q=200-2p and supply can be represented as p = 22 +Q/4. Suppose the external benefit to society of immunisation is B =Q/4 . The government considers subsidizing individuals to get immunized.
A manufacturer producing ball bearings claims that the mean weight of ball bearings produced is 5 ounces. The distribution is known to be normal with standard deviation 0.1 ounces. A random sample of 16 ball bearings is taken and their mean weight..
A special power tool for plastic produces costs 400, has a 4 year useful life, no salvage value and a 2-year-before tax payback period. Assume uniform annual end of the year benefits. A. Compute the before tax rate of return
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