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mid1ansm11 - First challenge Solutions Eco 212 Summer 2011...

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First challenge: Solutions Eco 212, Summer 2011 Question 1 (7 points). The nominal interest rate is the amount of dollars borrowers pay and lenders receive for loans, the real rate is what lenders can buy with their interest. Alternatively, the real rate is the rate of interest holding prices constant, so the dollars lent buy the same amount of goods as the dollars repaid. The nominal rate uses current prices, so the dollars repaid buy less than the dollars lent. All rates we see in the newspapers or on our bank statements, including student loans, are nominal rates. However, we care about real rates. Question 2 (10 points). The value of the finished goods, the two rings, is $3000 · 2 = $6000. Since all approaches give the same answer, we must get $6000 for both the value added and the income approach. Value added equals revenue less cost of goods. As seen in the table below, the mining co. has no cost of goods and $5000 in revenue. Thus the value added of the mining co. is $5000. Similarly, the value added of the jeweler is $1000. So the total value added equals $6000. As seen in the table below, the mining co. has no wages, and the jeweler has a wage bill of $500. The profits are revenues less cost of goods and wages, which total $5500. Thus total income equals wages plus profits which equals $6000. firm revenue cost of goods value added wages profits mining co. $1000 + $4000 0 $5000 0 $5000 jeweler $6000 $5000 $1000 $500 $500 total $6000 $500 $5500
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