Exam #1 Licence 1 (Mention européenne) – Macroeconomics This is

2) GDP= Sum added values = 3500+600+800+400+4500 = 9800 ... Here we suppose that if the interest rate is equal to the internal rate of return, the firm prefers.
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Exam #1 Licence 1 (Mention européenne) – Macroeconomics This is not an exhaustive version of the correction. This document is just to give you the main results and explanations. Exercice I. 1 ) Added value = sales – intermediate consumptions -

Added value steel producer : 2500+1000=3500 Added value rubber producer : 600 Added value machine-tools : 1800-1000=800 Added value tire producer : 1000-600=400 Added value bike producer : 8000-1000-2500= 4500

Remark : To buy a machine-tool is an investment, not an intermediate consumption. It does not have to be taken into account when calculating the added value. 2) GDP= Sum added values = 3500+600+800+400+4500 = 9800

Exercice II. 1) 0.8 = marginal propensity to consume 4 = fixed consumption

2) Saving function  S= Yd-C S= Yd-0.8Yd-4 S=0.2Yd-4

3) Marginal propensity to save = 1- marginal propensity to consume = 0.2 4) Average propensity to consume = C/Yd = 0.8+4/Yd APC is a decreasing function of income (APC falls when income rises). 5) For Keynesians: saving is a renunciation to consumption. It has depressive effects on the economy. An increase of savings leads to a decrease of consumption (Yd=C+S), which leads to a decrease of the output. This lower level of output leads to a decrease of investment. (then we still have the equality I=S verified) For classics: intertemporal trade-off between savings and consumptions. An increase in savings leads to a decrease of interest rate. In turn, it increases investments (S=I) which leads to a higher level of output (Y).

Exercice III.

1) From the most profitable to the lowest one : C > F > A > B > E > D

The higher is the internal rate of return, the higher is the profitability of the investment. 2) If the interest rate ≤ internal rate of return  Investment If the interest rate > internal rate of return  No investment. For a given level of interest rate, we can see which project will be chosen or not. Level of investments is therefore equal to the sum of the selected projects’ initial cost. Interest rate 22% 12% 6% 1%

Level of investments 25 150 225 287.5

Here we suppose that if the interest rate is equal to the internal rate of return, the firm prefers to make the investment (she is theoretically indifferent). 3) Make the graph. We observe a decreasing relation between the interest rate and investments. The lower is the interest rate, the more profitable are investments. The cost of borrowing (investment financed by debt) and the opportunity cost (investment financed by internal funding) are lower when interest rates decreases. It decreases the costs of investment which increases the level of investments. 4) It will increase investment levels. For instance, if the interest rate of the economy is 16%, only project C will be selected. But if the States offers a subsidy, let’s say of 1 percentage point (which leads to a 15% interest rate for the firm) , then project F will also be selected. In that example, investments would be increased by 87.5.

Exercice 4. 1) Net present value Year 1: 100000/1.1 = 90909 Year 2: 80000/(1.1)² + 500000/(1.1)² = 66115.7 + 41322 Present value of future income = 198347.11 Net present value = PV- initial cost= - 1652 NPV