Question

1. What are the short-run results of the government printing money to bail out banks with delinquent mortgages? What are the long-run results?
2. Why does printing money lead to inflation?
3. You were planning to spend Saturday working at your part-time job, but a friend asks you to go skiing. What is the true cost of going skiing? Now suppose you had been planning to spend the day studying at the library. What is the cost of going skiing in this case? Explain?
4. You win $100 in a basketball pool. You have a choice between spending the money now and putting it away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of spending the $100 now?
5. The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $3 million. If it would cost $1 million to finish development and make the product, should you go ahead and do so? What is the most that you should pay to complete development?

Answer 1

Ans

A it will cause inflation, expand credit and thus increase output, employment in short run. In longrun only prices rise because money is neutral in longrun. Printing money causes inflation because it real output remains same but more money is now chasing it

B True cost is money lost but not working in part time job

C The loss of knowledge that I could get by studying in library.

D 105 that I will earn by investing 100 today at 5% rate of interest

E yes I will go ahead since 4 million spend already is sunk cost. I can gain 3-1=2 million by going ahead. The most that I could pay is 3 million