ECON 110 Chapter Notes - Chapter 28: Monetarism, Demand Curve, Output Gap

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Chapter 28: money, interest rates, and economic activity. Bond riskiness: an increase in the riskiness of any bond leads to a decline in its expected present value and thus to a decline in the bond"s price, the lower bond price implies a higher bond yield. 28. 2 the theory of money demand: the demand for money is the amount of money that everyone wants to hold at any time. Households and firms hold money in order to carry out transactions (transactions demand for money: 2. Firms and households hold money because they are uncertain about when some expenditures might be necessary, so they hold money as a precaution to avoid the problems associated with a missing transaction (precautionary demand for money: 3. The monetary transmission mechanism: monetary transmission mechanism is the connection between changes in the demand for and supply of money and the level of aggregate demand, it operates in 3 stages, 1.

Related Questions

139.The present value of a future payment increases if the:
A) period between the present and the future increases.
B) future payment decreases.
C) interest rate decreases.
D) stock market falls

140. The present value of a future payment decreases if the:
A) period between the present and the future increases.
B) future payment increases.
C) interest rate decreases.
D) stock market rises.

141. The present value of future payments depends on:
A) the size of the payment.
B) the length of the time period.
C) the interest rate.
D) all of the above.

142. Given an interest rate of 3 percent, the present value of afuture payment of $2,080 to be paid in one year is:
A) $1,904.76
B) $2,000.00
C) $2,019.42
D) $2,080.00

Dr. Harold Wolf of Medical Research Corporation (MRC) was thrilledwith the response he had received from drug companies for hislatest discovery, a unique electronic stimulator that reduces thepain from arthritis. The process had yet to pass rigorous FederalDrug Administration (FDA) testing and was still in the early stagesof development, but the interest was intense. He received the threeoffers described below this paragraph. (A 10 percent interest rateshould be used throughout this analysis unless otherwisespecified.)

Offer I $1,000,000 now plus $200,000 from year 6 through 15. Alsoif the product did over $100 million in cumulative sales by the endof year 15, he would receive an additional $3,000,000. Dr. Wolfthought there was a 70 percent probability this would happen.

Offer II Thirty percent of the buyerâs gross profit on the productfor the next four years. The buyer in this case was ZbayPharmaceutical. Zbayâs gross profit margin was 60 percent. Sales inyear one were projected to be $2 million and then expected to growby 40 percent per year.

Offer III A trust fund would be set up for the next 8 years. At theend of that period, Dr. Wolf would receive the proceeds (anddiscount them back to the present at 10 percent). The trust fundcalled for semiannual payments for the next 8 years of $200,000 (atotal of $400,000 per year).

The payments would start immediately. Since the payments are comingat the beginning of each period instead of the end, this is anannuity due. To look up the future value of an annuity due in thetables, add 1 to n (16 + 1) and subtract 1 from the value in thetable. Assume the annual interest rate on this annuity is 10percent annually (5 percent semiannually). Determine the presentvalue of the trust fundâs final value.

Required: Find the present value of each of the three offers andindicate which one has the highest present value.

I am having problems with this problem from my Econcoursework. Iunderstand how to do parts 1 and 2, but amhaving trouble with parts3 and 4. For part 3, how do I dothe calculation for an infiniteperiod? As the time becomeslonger the present value goes to zero,so do i assume a period, oris there an actual method for infiniteperiods? For part 4,do I simply do the sum for the future value andplug it into thePresent value equation? Not really looking for thesolutionhere, but I need some help getting the third and fourthpartssolved.

Congratulations! You just won the lottery! You can elect toreceiveyour prize in one of four
payment streams:
(i) $1,000,000 now
(ii) $1,500,000 at the end of five years
(iii) $60,000 per year in perpetuity (for ever), with paymentsmadeat the end of each year (so your
first payment comes one year from today)
(iv) $150,000 per year for the next ten years, with payments madeatthe end of each year (so your
first payment comes one year from today)

Suppose the annual interest rate is 5% with certainty andinperpetuity. Calculate the present value of
each of the four payment options (i.e., in todayâs dollars).Rankfor four options from most to least
valuable. You can use Excel or a calculator to solve this, butyoumust show the formulas you use.

ECON 110 Chapter Notes - Chapter 28: Monetarism, Demand Curve, Output Gap

ECON 110 Full Course Notes

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