EC111Class13Answers

EC111Class13Answers - EC111 MACROECONOMICS Spring Term 2012...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
EC111 MACROECONOMICS Spring Term 2012 EC111 Class 13 Solution Question 1. a. The interest rate would be expected to influence investment because the decision rule for investment projects is that the net present value (NPV) must be positive. Each future addition to profit from undertaking an investment project is discounted to obtain the amount, which if invested today would yield that value in the future. The higher is the interest rate (and the more distant is the future return) the higher is the discount factor by which returns in period n must be divided. Hence the higher the interest rate, r, the fewer investment projects will have a positive NPV and the lower will be total investment. b. The returns to an investment project accrue in the future and so they are inherently uncertain. The evaluation of investment projects must therefore be based on expectations about the future. If expectations become more pessimistic then the NPV of investment projects will decline. Fewer potential investment projects will have a positive NPV and so less investment will be
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/15/2012 for the course EC 111 taught by Professor Timhatton during the Spring '12 term at Uni. Essex.

Page1 / 2

EC111Class13Answers - EC111 MACROECONOMICS Spring Term 2012...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online