You buy $1,000 worth of Walmart stock. Why wouldn’t a macroeconomist call this investment?
Describe how something you purchased depreciated over time and how its value changed.
Describe, using flows, stocks, and depreciation, why big changes in investment have relatively small impacts on the amount of capital in the economy.
Explain, using the opportunity cost principle, why building a new house for personal use counts as investment.
Would you prefer $1 million when you retire in 40 years, or $70,000 today that’s put in a bank account to compound for the next 40 years?
Would you be better off saving for retirement early in your career or later when you’re earning more? Explain.
Explain how you applied the Rational Rule for Investors to your own choice to invest in a college education, using the marginal principle, the cost-benefit principle, and the opportunity cost principle.
Do you think that people always follow the Rational Rule for Investors? Why or why not? Explain.
Think about how much you paid for your smartphone and how much it’s worth today. What’s the depreciation rate of your phone? Why has it lost value?
Do you think that companies should engage in investment during recessions? Explain.
Use the opportunity cost principle to explain the relationship between the real interest rate and investment spending. What does this tell you about the slope of the investment line?
Use the cost-benefit principle to describe how expectations change manager’s decisions to make new investments.
Are you currently a participant in the market for loanable funds? If so, which side? What effect does your current participation (or lack thereof) have on the market? Explain.
Come up with a real-world example of how an increase in the budget deficit would crowd out private investment.
Determine if the following scenarios are describing savings or investment. If they describe investment, which type of investment? Explain.
Amazon purchases $100 million worth of products from a Chinese manufacturer to add to its warehouse inventory.
SpaceX spends $5 million on writing and testing new code to improve its rocket stability.
The stock market experiences a major increase after the Federal Reserve announces that it won’t raise the interest rate.
1.2 million new homes were built in 2017 in the United States.
How do the following impact the capital stock? Be sure to identify depreciation and investment flows. Explain.
A consultant drops her laptop on the way to a big meeting and her IT department buys a replacement the next day.
The New York Times decommissions an older printing press instead of repairing it due to a decrease in print subscriptions.
If GDP is confidently expected to grow at a rapid 4% rate this year, how do you predict investment spending to change? Is it likely to grow at a larger, smaller, or the same rate as GDP? Why?
Capital per worker in China almost doubled between the 1990 and 2010. How do you expect China’s output per worker to have changed over the same period? Why?
Use the compounding or discounting formula to answer the following questions.
Your small business has a cash reserve of about $200,000, earning 2% annual interest. How much will that be worth in 3 years?
You want $1 million in your retirement account in 50 years. If your account grows at an annual rate of 4%, how much would you have to deposit today to reach $1 million in 50 years?
If you deposit $1,200 in your retirement account in your first year of work, how much will that $1,200 be worth after 5, 10, 20, 30, 40, and 50 years at an 8% interest rate? Graph your results. What do you notice? It may be easiest to use a spreadsheet to make the calculations.
Nigeria’s real GDP is expected to grow by about 5% per year for the next 5 years and inflation is expected to be about 8% per year. If its GDP is $300 billion, what will its nominal and real GDP be in 5 years?
Management at TJX Companies is deciding whether to build a new goods distribution center that will cost $60 million to build; the estimated additional first-year revenue will be $5 million. Future real revenues will decline due to a depreciation rate of 5% per year. The opportunity cost of this investment is the 7% real interest rate it could otherwise earn on its funds. Should TJX build the new distribution center? Explain. What level of first-year revenue would make this building profitable?
Consider the owner of a local boutique. She is deciding if she should upgrade the storage and display containers. The total cost would be $2,000, and the depreciation rate is 8% per year. The expected increase in next year’s revenue as a result of the investment is $400. Assuming an interest rate of 5%, use the marginal principle to determine whether the owner should make this investment.
Martha is considering acquiring another piano for her piano academy. The cost of a new Steinway grand is around $148,000. Pianos depreciate at a rate of about 5% per year, and the academy’s investment fund typically earns a return of about 10% per year. Additional revenues obtained through the increased teaching capacity enabled by the piano and renting the piano out for performances are expected to be about $30,000 per year. Should Martha acquire the piano?
The manager of a T-shirt company is considering investing in a new embroidery machine that would cost $8,500, and the depreciation rate is 6.5% per year. The expected increase in next year’s revenue as a result of the investment would be $1,500. For what values of the interest rate should the company make this investment?
You are working for a major bank, forecasting investment. Consider what happens to investment in each of the following scenarios. Show the change graphically, using the investment line.
The economy is in a recession, and firms’ cash reserves are declining.
Congress passes the Tax Cuts and Jobs Act (TCJA), which lowers corporate income taxes.
The Federal Reserve decides to raise interest rates.
A new technology is discovered that increases the productive capacity of factories.
Determine if the following people are demanders, suppliers, or not involved in the market for loanable funds.
Latisha wants to save up for a new laptop to use in her business, so she puts aside $100 a month until she can afford it.
Gerardo borrows $30,000 from his local bank for a new addition to his warehouse.
Dana buys $1,200 of stocks every year in her retirement account.
Evaluate the effect of each of the following events on the market for loanable funds. Explain the effects on savings, investment, and the neutral real interest rate.
The government runs a government budget surplus instead of a deficit.
The government decides to forgive some of the $1.53 trillion in student loan debt.
Chinese investors stop sending their funds to the United States, reducing net capital inflows.
The nominal interest rate rises 1% in response to a 1% rise in the inflation rate.
Which of the following factors could cause the neutral real interest rate to fall?
Massive government budget deficits in the United States
Slowing population growth
A global savings glut
The falling costs of capital equipment