Macro I (22104-22105) 2024-2025
Problem Set #5 (Due Nov 19th)
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Instructions: Work with your seminar group. Submit ONE answer in PDF in Aula Global
(Turnitin) by the deadline. For math questions, indicate the main steps needed to get your
answer. In your graphs, clearly label the axis, variables, and equilibria.
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Exercise #1: DEBATE Common Currency Areas with High Inflation
Prepare the debate about the Common Currency Areas with High Inflation using the
background material available in Aula Global in the reading folder AND using the LINKS to
articles included in the Debate Guidelines and additional sources (data or articles) you may find
appropriate.
• The two presenting groups must prepare their presentation, uploading the
corresponding slides in a separate file using Turnitin (one group member submits
the solutions to this problem set, and another one the slides).
• As part of the solution to this problem set, the remaining groups should submit a
question that could be asked during the debate based on the background material.
They may ask a different question during the debate, depending on how the debate
evolves (e.g., their question has already been asked/answered).
• See debate guidelines for other issues.
Exercise #2: House Prices in Barcelona
In real estate investment, house prices are often calculated as the present discounted value of
expected rental income, net of ongoing costs such as repairs and maintenance. This approach allows
investors to estimate the fair value of a property based on its ability to generate income over time.
Imagine a house in the center of Barcelona where the monthly rent is €1,800, and monthly repair
costs are €150. The annual interest rate is 4%. Assume there are no property taxes, and the house
has an indefinite lifespan (i.e., we can treat it as a perpetuity).
Sources:
• Average Rental Prices in Barcelona: [Link]
• Maintenance and Repair Costs: [Link].
• Interest Rates in the Euro Area: Key ECB Interest Rates.
Questions:
a) Determine the annual net income from renting out the house, accounting for repair costs.
b) Using the PDV formula for a perpetuity, compute the fair price of the house based on its net
rental income.
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c) Consider an Alternative Scenario Where Repair Costs Increase to €250 per Month.
Recalculate the present discounted value of the house under this new assumption. How
much does the fair house price decrease due to higher repair costs?
d) Suppose you’re considering purchasing this house as an investment. The current market
price of the house is €500,000.
o Evaluate the Investment with the Baseline Repair Costs. Given the original
monthly repair cost of €150, is it worth purchasing the house at €500,000? Compare
the present discounted value of the net rental income to the market price.
o Evaluate the Investment with Increased Repair Costs: Now assume monthly
repair costs increase to €250. Recalculate the PDV and determine if the investment is
still worthwhile at €500,000 under this new cost scenario.
Exercise #3: Government Policies and Green Investment
A government wants to foster investment in green technologies as part of its climate action and
emission reduction plan (see e.g., the EU Green transition plan). The goal of the exercise is to
calculate the size of the tax / subsidy needed to induce firms to invest in green technologies.
In particular, consider the following situation faced by an average firm in the economy, which has
to choose between two alternative investments:
• “Green” Investment: The cost of adopting an innovative “green” technology is 100.000€.
That technology will be operative starting from next year, and for a total of 10 years, and
generate additional profits for 20.000€ in the first year that depreciate at a rate of 8% per
year.
• “Brown” Investment: The cost of adopting an old-style “brown” technology is 85.000€.
That technology will be operative for 10 years and generate additional profits for 20.000€ in
the first year that depreciate at a rate of 10% per year.
For simplicity, suppose that the cost of borrowing is 2% per year, and that the inflation rate equals
0.
a) Calculate the size of the subsidy on “green” investment that is needed to induce a typical
firm to prefer “green” technology over the “brown” technology [HINT: calculate the Net
Present Value of investing into the “Green” and “Brown” technology, i.e., the difference
between the Present Value of additional profits minus the cost of investment].
b) A group of economist thinks that introducing a subsidy is not feasible, as it would be too
costly for the government’s finances. Thus, they propose to introduce a tax on profits
generated each year by the “brown” technology. What should be the minimum tax rate on
“brown” profits to induce firms to prefer the “green” investment?