Answer the following questions about interest rates and present values:

Answer the following questions about interest rates and present values:
(a) Which interest rate (nominal or real) affects investment? Which affects money demand?
How do changes in the relevant interest rate affect these variables?
(b) A restaurant is considering remodeling. It estimates the remodel will cost $6,000 and
as a result revenues will rise by $3,000 the first year, $2,500 the second year, $1,500
the third year and have no effect in subsequent years. If the interest rate is 5%, should
the restaurant remodel? Support your answer.
(c) Suppose a household has a fixed rate mortgage. If the household pays $z each year,
starting this year, for the next 30 years, what is the present value of the mortgage
payments? Write your answer as a geometric series first (with 30 terms) and then
reduce it to a single term.

 

In: Economics

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