Author Question: Changes in interest rates affect all four components of aggregate demand. Indicate whether the ... (Read 75 times)

rmenurse · **on:** Jun 29, 2018

Changes in interest rates affect all four components of aggregate demand.

Indicate whether the statement is true or false

Question 2

You start your own business selling boating equipment. To start the business you sell 5,000 shares of stock at 50 each. This year the revenues from the business are 300,000, and total costs of operating the business are 200,000 .

All profits are paid out as dividends to the shareholders. If the current interest rate is 20, what is the economic profit being earned by the shareholders? What will happen to the amount of economic profits earned if the interest rate decreases? Explain your answer.

ryansturges · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

FALSE

Answer to Question 2

The shareholders are earning an economic profit of 10 per share. We get this by adding up the total costs of the firm: 200,000 plus the opportunity cost of the initial 250,000 which is 50,000 of lost interest income. That gives us a total of 250,000 in total costs. Since revenues are 300,000 the total profit is 50,000 with profit per share of 50,000/5,000 = 10 . If the interest rate decreases, the shareholders' economic profit will increase. The shareholder will still receive 20 in dividends, if they had put their 50 in an interest-bearing account the return would fallen below 10 . Therefore, their economic profit would increase.