Reference no: EM131022408
Practice Questions #1
Goal:
- Review introductory material
- Provide numerical examples of material presented in class
- Provide a list of relevant terms
1. Below is a list of terms discussed in class. Provide a definition for each and where appropriate use the terms in an example. In addition, write a brief statement of the term's significance.
Aggregate Output GDP Deflator
Aggregate Income Consumer Price Index (CPI)
Securities Financial Markets
Budget Deficits Asset
Business Cycles Liability
Inflation Indirect Finance
Money Direct Finance
Interest Rates Debt
Monetary Policy Equity
Financial Intermediation Maturity
GDP Primary Market
Doublecounting problem Secondary Market
Factors of Production Liquidity
Factor Market Money Market
Real Values Capital Market
Nominal Values Output Market
Sectors of the Economy
2. Suppose you purchase a one-year discount bond with a face value of $10,000 for $8000. What is the interest rate you will earn at the maturity date?
3. Suppose interest rates increase to 28%. If you decide to sell the bond you purchased in problem 2 before its maturity date, what will be the maximum price people will pay for it?
4. Suppose interest rates fall to 20%. Someone offers to buy the bond you purchased in problem 2 for $8200. Should you sell it to them?
5. Suppose the tax rate for the marginal investor is 10%. If the interest rate paid on certificates of deposit is 5.25%, what must the interest rate on municipal bonds be in order for the marginal investor to be indifferent between purchasing municipal bonds or CDs?
6.
a. Suppose the tax rate for the marginal investor decreases to 5%. If the interest rate on certificates of deposit remains at 5.25%, what must the rate on municipal bonds be in order for the marginal investor to be indifferent between purchasing municipal bonds or CDs?
b. Suppose an investor has a tax rate of 3%. Given your answer in (a), which investment will this investor prefer?
7. If a dollar is worth one dollar when the price index is 100,
- what is the value of the dollar if the price index increases to 200?
- What is the value of the dollar if the price index increases to 300?
- What is the value of the dollar if the price index increases to 400?
- What is the value of the dollar if the price index increases to 170?
- What is a generalized formula for the problems a) through d)?
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