Suppose that owning the building for a year would earn you $8,000. To decide whether you will be better off by owning it for one year and then selling it, you seek advice from three different people: (1) Your brother says that you should not buy the building because in one year it will cost you $150,000. (2) Your accountant says that you should definitely buy the building because you can borrow $150,000 at zero interest while the building will generate $8,000 in extra income. Then when you sell it, you will be $8,000 richer. (3) Your bookkeeper says that if you sell the building in a year, you will have to come up with more money to pay off the loan than you will make in extra income. Keeping in mind that the economy experiences deflation at the rate of 10%, your The extra income you will earn will be less than the cost of owning the t accountant year When the nominal interest rate is zero, you do not incur any cost when brother loan When the nominal interest rate is zero, the cost of a building is its full p bookkeeper is right because: Now, suppose you inherit $150,000 in cash from your uncle who had kept it hidden in his mattress. Assuming the nominal interest rate is -1%, which of the following options will maximize the amount of cash that you have in one year? Depositing the cash in a bank, because the 10% deflation makes the value of your dollars fall even more rapidly than 1% per year Buying the building, because you can earn an additional $8,000 in income if you own the building for one year and then sell it Holding on to your $150,000 in cash True or False: A high real interest rate will keep firms from borrowing to finance investment in capital, but it will not keep firms with cash from investing in capital. True False
Suppose that owning the building for a year would earn you $8,000. To decide whether you will be better off by owning it for one year and then selling it, you seek advice from three different people: (1) Your brother says that you should not buy the building because in one year it will cost you $150,000. (2) Your accountant says that you should definitely buy the building because you can borrow $150,000 at zero interest while the building will generate $8,000 in extra income. Then when you sell it, you will be $8,000 richer. (3) Your bookkeeper says that if you sell the building in a year, you will have to come up with more money to pay off the loan than you will make in extra income. Keeping in mind that the economy experiences deflation at the rate of 10%, your The extra income you will earn will be less than the cost of owning the t accountant year When the nominal interest rate is zero, you do not incur any cost when brother loan When the nominal interest rate is zero, the cost of a building is its full p bookkeeper is right because: Now, suppose you inherit $150,000 in cash from your uncle who had kept it hidden in his mattress. Assuming the nominal interest rate is -1%, which of the following options will maximize the amount of cash that you have in one year? Depositing the cash in a bank, because the 10% deflation makes the value of your dollars fall even more rapidly than 1% per year Buying the building, because you can earn an additional $8,000 in income if you own the building for one year and then sell it Holding on to your $150,000 in cash True or False: A high real interest rate will keep firms from borrowing to finance investment in capital, but it will not keep firms with cash from investing in capital. True False
Chapter17: Capital And Time
Section: Chapter Questions
Problem 17.6P
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Transcribed Image Text:Suppose that owning the building for a year would earn you $8,000. To decide whether you will be better off by owning it for one year and then selling
it, you seek advice from three different people: (1) Your brother says that you should not buy the building because in one year it will cost you
$150,000. (2) Your accountant says that you should definitely buy the building because you can borrow $150,000 at zero interest while the building
will generate $8,000 in extra income. Then when you sell it, you will be $8,000 richer. (3) Your bookkeeper says that if you sell the building in a year,
you will have to come up with more money to pay off the loan than you will make in extra income.
Keeping in mind that the economy experiences deflation at the rate of 10%, your
The extra income you will earn will be less than the cost of owning the t accountant year
When the nominal interest rate is zero, you do not incur any cost when brother loan
When the nominal interest rate is zero, the cost of a building is its full p bookkeeper
is right because:
Now, suppose you inherit $150,000 in cash from your uncle who had kept it hidden in his mattress.
Assuming the nominal interest rate is -1%, which of the following options will maximize the amount of cash that you have in one year?
Depositing the cash in a bank, because the 10% deflation makes the value of your dollars fall even more rapidly than 1% per year
Buying the building, because you can earn an additional $8,000 in income if you own the building for one year and then sell it
Holding on to your $150,000 in cash
True or False: A high real interest rate will keep firms from borrowing to finance investment in capital, but it will not keep firms with cash from
investing in capital.
True
False
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