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ECS 1601 Assessment 3_ Attempt review 2023
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ECS 1601 Assessment 3_ Attempt review 2023
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ECS1601-23-S1
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UNISA
2023
Semester 1
ECS1601-23-S1
Online assessments
Assessment 3
Started on Sunday, 23 April 2023, 9:32 PM
State Finished
Completed on Sunday, 23 April 2023, 10:01 PM
Time taken 29 mins 9 secs
Marks 18.00/20.00
Grade 90.00 out of 100.00
Question 1
Correct
Mark 1.00 out of 1.00
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Question text
Which of the following statements about the investment decision is correct?
a.
Changes in the interest rate affect the decision to buy capital goods and financial assets.
b.
When an expansionary monetary policy is applied, the opportunity cost of buying capital goods is higher
than that of buying financial assets.
c.
Acquiring new machinery and equipment for a firm is a low-risk investment because the interest rate is the
only factor to consider when buying these capital goods.
,d.
For an investment to be profitable, the interest rate on a loan has to exceed the expected return on new
machinery for a firm.
Feedback
Yes, changes in the interest rate affect the decision to invest in capital goods and financial assets. Interest
rates affect the return on investment and the opportunity costs of buying either capital goods or financial
assets. When interest rates are higher, the return on financial assets is higher, making it less profitable to
invest in capital goods. Higher interest rates increase the cost of financing new machinery and equipment for
firms. Higher financing costs reduce the return on capital goods, thereby reducing profits and return on
investment. Likewise, when interest rates are lower, the returns on financial assets are lower, making it more
profitable to buy capital goods. Lower interest rates decrease the cost of financing new machinery and
equipment. Lower financing costs increase the return on capital goods, thereby increasing profits and return
on investment.
An expansionary monetary policy refers to reducing interest rates and increasing investment expenditure to
increase the level of aggregate spending and income in the economy. Therefore, the opportunity cost of
buying capital goods is lower because it will be cheaper for firms to fund their investments at lower
financing costs. However, when interest rates are lower, the return on financial assets such as fixed deposits
and interest-bearing savings accounts will be lower. This makes investing in these financial assets less
attractive.
The expected return on new machinery for a firm has to exceed the interest rate on a loan in order for the
investment to be profitable. This is because investors need to be compensated for the risk they take when
buying new machinery. When the expected return on capital goods is higher than the interest rate, it is
relatively cheaper to finance the investment. This means that the expected cash inflows from the new
machinery will repay the debt and leave behind a net profit and net positive return on investment.
When new machinery and equipment are bought to produce goods and services more efficiently, the interest
rate is not the only factor to consider. Capital goods need to be insured against theft, damages and loss.
Machinery and equipment also need maintenance, repairs and service to operate efficiently. Also, the firm
needs to have workers that can operate the machinery, so training costs are involved. All these additional
costs make it riskier to invest in capital goods. These costs are factored into a firm’s operating expenses and,
ultimately, its profits and return on investment.
Question 2
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Mark 1.00 out of 1.00
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Question text
This question is based on the information below:
Based on the information above, what is the change in government spending required for the economy to
reach full employment? (at each step of your calculation, round off to 2 decimal places)
, a.
R3 689 million
b.
R2 229 million
c.
R2 771 million
d.
R1 311 million
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