Solution Manual for Macroeconomics, 2nd Edition

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SOLUTIONS MANUALWebChapter1Financial Decision MakingQuestions1.Explain the following terms:i.Compound returnsii.Principaliii. Rate of return on an investmentiv.Holding periodAnswer:i.Compound returnsare generated when short-term returns are repeatedly reinvested,thereby causing an investment to earn returns onboththe initial investmentandon pastinvestment returns.ii.An investor’sprincipalis the value of her initial investment.iii.Therate of return on investmentis calculated by (i) dividing the final value of aninvestment by the initial investment (one year earlier), and (ii) subtracting one from theratio.iv.The time delay between the initial investment and the final withdrawal is referred to as theholding period.A-head: INVESTMENT RETURNSConcept: Compound returns, principal, interest, holding period2.Suppose you choose an investment that has historically generated an average nominal return of5 percent per year. Explain how inflation and risk may affect your future real rate of return on thisinvestment.Answer:Inflation reduces the buying power of money. Any appreciation in the value of the final balance willneed to be adjusted to account for rising prices. In other words, if the prices of goods and servicesincrease during the holding period, the real rate of return on the initial investment is lower than thenominal rate of return. The real rate of return is the nominal rate of return minus the inflation rate.Risk implies that the return on the investment is not guaranteed. So the rate of return that youexperience may be greater or lower than the historical average rate of return.A-head: INVESTMENT RETURNSConcept: Inflation, risk

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Economics

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Macroeconomics by Daron Acemoglu, D...

Solution Manual for Macroeconomics, 2nd Edition

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