...consumption and saving schedules. 2. Explain how consumption and saving are related to disposable income in the aggregate expenditures model. 3. Complete the following table assuming that (a) MPS = 1/5, (b) there is no government and all saving is personal saving. Level of output and income Consumption Saving $250 $260 $___ 275 ____ ___ 300 ____ ___ 325 ____ ___ 350 ____ ___ 375 ____ ___ 400 ____ ___ 4. Complete the following table assuming that (a) MPS = 1/3, (b) there is no government and all saving is personal saving. Level of output and income Consumption Saving $100 $120 $___ 130 ____ ___ 160 ____ ___ 190 ____ ___ 220 ____ ___ 250 ____ ___ 5. Differentiate between the average propensity to consume and the marginal propensity to consume. 6. What are the marginal propensity to consume (MPC) and marginal propensity to save (MPS)? How are the two concepts related? How are the two concepts related to the consumption and saving functions? 7. Suppose a family’s annual disposable income is $8,000 of which it saves $2,000. (a) What is their APC? (b) If their income rises to $10,000 and they plan to save $2,800, what are their MPS and MPC? (c) Did the family’s APC rise or fall with their increase in income? 8. Complete the accompanying...
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...Question #4 Can you make poor investment decisions and be profitable? What evidence do you see from the companies’ results that indicate how well they made investment decisions (capital budgeting). A company can make poor investment decisions and still remain profitable, but only for a time. A company cannot continually make poor investment decisions and remain profitable forever. When looking at the Coke vs Pepsi case study, we find that Doug Ivester, then CEO of Coke, made a bad investment decision when he chose to increase the rate charged for syrup to franchisers. As a result, bottlers raised prices to improve profitability, and in turn there was a decrease in overall sales volume. During the time Ivester was CEO, the net income for Coke fell 41% and he ended up without a job. Had this been a trend that continued, Coke would have been out of business, but they rebounded and remain profitable. This example shows that a company can make a bad decision and continue to be profitable in the long run. But, repeat bad investment decisions and a company will go broke. Question #5 How does WACC change over time? What do you think might drive the changes? WACC is the opportunity cost of investing in a company, or the expected return of shareholders and debt holders. WACC consists of all capital sources and includes common stock, preferred stock, short-term debt and long-term debt in the calculation. WACC is the average costs of capital financing, and tells us how much a company...
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...Running head: LONG-TERM INVESTMENT DECISIONS 1 Long-Term Investment Decisions Juanita Bates Professor: Mohammad Sumadi ECO 550 Managerial Economics and Globalization December 5, 2015 Long-Term Investment Decisions 2 Abstract Microwave food have taken place of the traditional family-styled dining in today’s fast-paced society. There are a variety of microwavable food for consumers to choice from. With today’s health conscious society, the microwave food industry have adapted to meet the preferences of the consumers by producing low calorie frozen microwavable foods. With the growth of this market, it is important that companies in this market have a good marketing plan along with a good strategic business plan. An important long-term decision a business can make is whether or not to invest. The process of evaluating the sustainability of long-term investments with a view of distributing financial resources to investments that are profitable is known as capital budgeting. Capital budgeting focuses on investment costs related to the benefits generated during their economic life. This is one of the most important decisions for a company because it helps with the appraisal and selection of investments that are most feasible. It also helps with the decision of accepting or rejecting investment proposals. Evaluating...
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...• The effects of alternative policies on the composition of output • The U.S. economy in the 1980s and 1990s • Anticipatory monetary policy • The policy mix during the German re-unification Changes from the Previous Edition: The material in this chapter has been updated, but its format is essentially the same. More emphasis is given to the economic expansion in the U.S. in the 1990s. Introduction to the Material: Chapter 11 uses the IS-LM model derived in Chapter 10 to show how monetary and fiscal policies can be used to dampen economic disturbances. The economic effects of various policy mixes are highlighted in discussions of actual events: the recession and recovery in the United States in the 1980s, the U.S. recession in 1990-91, the long economic expansion thereafter, and the policies enacted by Germany during the re-unification process in 1990-92. First, the Fed's conduct of monetary policy is discussed, with an explanation of how open market operations can be used to change nominal money supply. The effectiveness of monetary policy in changing the amount of output demanded depends on the steepness of the LM-curve. The transmission mechanism, that is, the process by which monetary policy changes affect the economy, occurs in several steps. First, a change in money supply leads portfolio holders to make adjustments in their asset holdings. As a result, asset prices and interest rates change. The change in interest rates subsequently affects intended...
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...line? What is its slope? If government expenditures would be positive function of output, how would the Keynesian cross change? We will go over this on the review session – easier to explain than on paper. The intersect point represents the equilibrium output. Black line – planned expenditures Blue line – realized expenditures If government expenditures would be positive function of output the blue line would shift up. 2. What are the tools of fiscal policy? Fiscal policy has 3 tools: 1. Increase or decrease government expenditures 2. Cut or increase taxes 3. Increase or decrease transfer payments 3. Explain the mechanism of government expenditures multiplier – why is the effect on the output greater than initial increase in government expenditures? The government purchases multiplier is ∆Y/∆G Initially, the increase in G causes an equal increase in Y, so ∆Y=∆G, But with increasing Y will be increasing C(Y-T) →further ↑Y →further ↑C →further ↑Y So government purchases multiplier will be greater than 1, it is same principal like with Bank’s creation of money when lending out. 4. Explain the mechanism of tax multiplier – why is the effect on the output greater than initial cut in taxes? Increase in taxes reduces consumer spending, which reduces equilibrium income. Firms reduce output...
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... Eco 304L Fall 2014 Topic 6 – Financial Markets The Financial System -‐ How Businesses Finance Themselves Saving and Investment (National Income Accounting Redux) Ricardian Equivalence and Temporary vs. Permanent Taxt Cuts The Market For Loanable Funds – Modeling Financial Markets 1 Topic 6 – Financial Markets The Financial System -‐ How Businesses Finance Themselves The Financial System The Pinancial system is made up of !inancial institutions that bring borrowers and lenders together ¤ Financial markets: institutions through which borrowers and lenders come together directly ¤ bond markets n stock markets n ¤ Financial intermediaries: organizations that interact with borrowers and lenders separately and bring them together indirectly banks n mutual fund n 2 Financing a company ¨ How can a company raise funds? Self-‐!inance ¤ Borrow indirectly from a Pinancial ...
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...Keynes’ Income or Investment Multiplier: Keynes’ income multiplier tells us that a given increase in investment ultimately creates total income which is many times the initial increases in income resulting from that investment. That is why it is called income multiplier or investment multiplier. Income multiplier indicates how many times the total income increases by a given initial investment. Suppose Rs. 100 million are invested in public works and as a result there is an increase of Rs. 300 million in income. In this case, income has been increased 3 times, i.e., the multiplier is 3. If ΔI represents increase in investment, ΔY indicates increase in income and K is the multiplier, then the equation of multiplier is as follows: The multiplier is the numerical co-efficient showing how large an increase in income will result from each increase in investment. The multiplier is the number by which the change in investment must be multiplied in order to get the resulting change in income. It is the ratio of change in income to the change in investment. If an investment of Rs. 50 million increases income by Rs. 150 million, the income multiplier is 3 and if Rs. 200 million, the multiplier is 4 and so on. In the following multiplier equation, the relationship between income and investment is determined through marginal propensity to consume: Where: (mps: Marginal Propensity to Save) Therefore, the third multiplier equation is: It should be noted that the size of...
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...consecutive quarters. Recessions have been studied, analyzed, and written about from virtually every angle in everyone’s quest to identify and prevent future ones. One the more intriguing aspects of recession analysis is a look at how businesses choose to invest at the beginning of an economic recession given the history of the government promoting investment incentives or investment credits. In order to examine how a firm may act in anticipation of business investment, friendly policy it’s vital that we examine how they have acted when these policies have been enacted and legislated during past recessions. During The Great Recession of 2007-early 2009, pro-business investment stimulus measures were enacted to increase loss carry backs and additional incentives for firms making investment in these times of extreme uncertainty. Each economic measure taken in the wake of the most recent global recession include some element of business, investment incentives. “Allowing greater use of NOL carry-forwards and tax credits during recessions would provide a modest fiscal stimulus while also reducing tax penalties on risky investment. (Viard 2009)” The Jobs and Growth Tax Relief Reconciliation Act of 2003 gave businesses wide ranging incentives to investment in the...
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...Running head: PROBLEM SOLUTION: INTERSECT INVESTMENTS Problem Solution: Intersect Investments Michelle Wickham University of Phoenix Problem Solution: Intersect Investments Intersect Investment is an organization operating in the financial services industry that has been experiencing financial difficulties because of its inability to improve falling sales and establish long term customer relationships. The company has been struggling for the past four years and the leaders of the organization have resisted making needed changes in the company’s strategic direction. CEO, Frank Jeffers wanted to change the direction of the company and created a new vision for the organization “Provide a broad set of products and services to consumer and small business customers using a model of customer intimacy that will build long-term relationships based on trust and value to the customer” (University of Phoenix, 2010, p. 1). Jeffers is aware of the tough road ahead for the company and has rallied his troops to share his vision to help the struggling organization regain its profitability. There are major obstacles on the road to achieving the new mission as some key staff members are resistant to the change efforts. For the new vision to be a success the organization requires a major overhaul of its current practices; however, all obstacles to change efforts must be overcome. Additionally, a clear and concise plan must be developed and include strategies for addressing...
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... Lecture Outline Balance of Payments Current Account Capital and Financial Accounts International Trade Flows Distribution of U.S. Exports and Imports U.S. Balance of Trade Trend International Trade Issues Events That Increase International Trade Trade Friction Factors Affecting International Trade Flows Impact of Inflation Impact of National Income Impact of Government Policies Impact of Exchange Rates Interaction of Factors Correcting a Balance of Trade Deficit Limitations of a Weak Home Currency Solution International Capital Flows Distribution of DFI by U.S. Firms Distribution of DFI in the U.S. Factors Affecting Direct Foreign Investment Factors Affecting International Portfolio Investment Agencies that Facilitate International Flows How Trade Affects an MNC’s Value Chapter Theme This chapter provides an overview of the international environment surrounding MNCs. The chapter is macro-oriented in that it discusses international payments on a country-by-country basis. This macro discussion is useful information for an MNC since the MNC can be affected by changes in a country’s current account and capital account positions. Topics to Stimulate Class Discussion 1. Is a current account deficit something to worry about? 2. If a government wants to correct a current account deficit, why...
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...Executive summary In this empirical report, we have analyze the characteristics of several important economics indicators and how they can be use by economist to look out for period of inflation, sharp changes in GDP growth due to GST and oil shock and how to make use of this indicators to do a projection on the economy performance. We also come to understand how different types of economic indicators are used and how they correspond to the movement economy activities. Understanding the characteristic of these economic indicators, allows us to identify the cyclical nature of each individual indicator with economic growth and, thus, help us in choosing a set of economic indicators for forecasting the economic performance. To conclude, we state that by doing an economic indicator analysis through leading, coincident and lagging indexes, we can understand how well the economy performance as a whole. It also tells us the relationship between economy performance and the policy-making of a country. Introduction The measurement and analysis of business cycles has been one of the important research topics in economics and underlying theories of these economics arguments have changed as times goes by. In this empirical report, attention will be focus into the central questions on the causes of fluctuation in the economic activity by constructing a business cycle analysis and composite coincident index, a combination of several time series that one would expect to contain...
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...dangerous, they’re unclear on exactly how fiscal policy shapes the competitiveness of the nation and of their companies. The current policy is eroding competitiveness in several ways, and business conditions in the United States will deteriorate if there’s no change in direction. A better understanding of how fiscal policy and competitiveness are linked may make such a change more likely. How does fiscal policy affect competitiveness? To answer, we need a clear definition of “competitiveness”—which is, in our view, the extent to which a nation’s companies can succeed in the global marketplace while its people enjoy a high and rising standard of living. Companies compete on the basis of production costs for a certain amount of output. The only way to lower those costs while sustaining and raising workers’ standard of living is to increase productivity, or output per worker. Raising productivity requires improving human capital, increasing physical capital (equipment or software, for example), or using these forms of capital more efficiently. Let’s look at how the spending side of fiscal policy relates to these three drivers. Many public goods provided by the government contribute directly to one or more of them. Spending to improve public education, for instance, can increase human capital. Spending on infrastructure can increase physical capital. Publicly funded R&D, effective regulation, and incentives for private-sector innovation can lead to a more efficient use of human...
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...inflation on interest rates and investment returns. a. Inflation defined. Presentation of data of average inflation for every decade since the 1950’s b. Discuss which decade had the highest inflation and which had the lowest. 2. Purchasing power and how inflation affects purchasing power a. Purchasing power defined. b. Looking at the basket of goods that determine the Consumer Price Index. Taking a look at what those things cost today versus what they cost in 1979 (my birth year) adjusted for inflation. 3. Inflation’s effects on investment returns and interest rates. a. Adjusted value versus inflation adjusted value. b. What happens to the difference between these two values when; i. Inflation increases ii. The investment horizon lengthens iii. Expected returns increase 4. Measurement of inflation and usual government reactions to inflation. a. Discussing the current CPI level. b. Actions the government takes when inflation is high or low. Conclusion- Restating key research findings on the effects of inflation. Offer insights gained on the effects of inflation and how investor may adjust their strategies. Further, the effects of inflation on households in terms of loans, purchasing, and personal investments (retirement). Inflation is defined as the sustained increase in the general price level of goods and services. It is measured as an annual percentage increase. Inflation is one of the major macroeconomic...
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...× initial investment = .06 × $100 = $6 You start the year with $100 and you earn interest of $6, so the value of your investment will grow to $106 by the end of the year: Value of investment after 1 year = $100 + $6 = $106 Notice that the $100 invested grows by the factor (1 + .06) = 1.06. In general, for any interest rate r, the value of the investment at the end of 1 year is (1 + r) times the initial investment: Value after 1 year = initial investment × (1 + r) = $100 × (1.06) = $106 What if you leave this money in the bank for a second year? Your balance, now $106, will continue to earn interest of 6 percent. So Interest in Year 2 = .06 × $106 = $6.36 You start the second year with $106 on which you earn interest of $6.36. So by the end of the year the value of your account will grow to $106 + $6.36 = $112.36. In the first year your investment of $100 increases by a factor of 1.06 to $106; in the second year the $106 again increases by a factor of 1.06 to $112.36. Thus the initial $100 investment grows twice by a factor 1.06: Value of account after 2 years = $100 × 1.06 × 1.06 = $100 × (1.06)2 = $112.36 If you keep your money invested for a third year, your investment multiplies by 1.06 each year for 3 years. By the end of the third year it will total $100 × (1.06)3 = $119.10, scarcely enough to put you in the millionaire class, but even millionaires have to start somewhere. Clearly for an investment horizon of t years, the original $100 investment will grow...
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...Which Is Better, Equity Investment or Debt Investment? Take a few minutes to ponder the way the two investment alternatives answered the three questions. If you were advising Charlene, which investment would you suggest she make? If you were the one with the $500,000 to invest, which alternative would you choose? On the surface, it appears to be no contest. Although the answer to Question 1 was essentially the same for both alternatives, the debt investment alternative is much more certain in its answers to Questions 2 and 3 than is the equity investment alternative. So why would Charlene (or anyone, for that matter) even consider the equity investment as an alternative? The one-word answer to that question is POTENTIAL! Although risk is associated with any investment, equity investments are inherently riskier than debt investments. With the additional risk, however, comes the potential for greater reward. Assume that the following events happen during the five-year period of Charlene's two investment alternatives in Weatherman Corporation. The company earns net income each year of $10 million for the next five years. If Charlene chooses the bond alternative, she will receive $20,000 interest every six months for five years and then will receive her $500,000 back. But what if Weatherman’s net income turns out to be $100 million each year for the next five years, or even $1 billion each year? How will that affect Charlene’s return if she purchases the bonds? The answer is...
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